-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OS2FfWB7lq990kKbgksFuIb7P3UEg5ttqqU43y8L/ufmiI9HB21q6oSTiFXEPfay S/WYe1sGVnvKuiosUNCGPA== 0000040554-02-000029.txt : 20020415 0000040554-02-000029.hdr.sgml : 20020415 ACCESSION NUMBER: 0000040554-02-000029 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL ELECTRIC CAPITAL CORP CENTRAL INDEX KEY: 0000040554 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 131500700 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-22265 FILM NUMBER: 02570846 BUSINESS ADDRESS: STREET 1: 260 LONG RIDGE RD CITY: STAMFORD STATE: CT ZIP: 06927 BUSINESS PHONE: 2033574000 MAIL ADDRESS: STREET 1: 260 LONG RIDGE ROAD CITY: STAMFORD STATE: CT ZIP: 06927 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL ELECTRIC CREDIT CORP DATE OF NAME CHANGE: 19871216 10-K 1 gecc2001k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10-K __________________________ |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ ________________ Commission file number 1-6461 ________________ General Electric Capital Corporation (Exact name of registrant as specified in its charter) Delaware 13-1500700 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 260 Long Ridge Road, Stamford, Connecticut 06927 (203) 357-4000 - --------------------------------------- --------- ----------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) ________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each Title of each class exchange on which registered - ------------------------------------ ---------------------------- 7 7/8% Guaranteed Subordinated Notes New York Stock Exchange Due December 1, 2006 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| At March 7, 2002, 3,837,825 shares of voting common stock, which constitute all of the outstanding common equity, with a par value of $0.01 were outstanding. Aggregate market value of the outstanding common equity held by nonaffiliates of the registrant at March 7, 2002. None. DOCUMENTS INCORPORATED BY REFERENCE The consolidated financial statements of General Electric Company, set forth in the Annual Report on Form 10-K of General Electric Company for the year ended December 31, 2001 are incorporated by reference into Part IV hereof. REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.
TABLE OF CONTENTS Page PART I Item 1. Business .......................................................................................... 1 Item 2. Properties ........................................................................................ 13 Item 3. Legal Proceedings ................................................................................. 13 Item 4. Submission of Matters to a Vote of Security Holders ............................................... 13 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ......................... 14 Item 6. Selected Financial Data ........................................................................... 14 Item 7. Management's Discussion and Analysis of Results of Operations ..................................... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................ 27 Item 8. Financial Statements and Supplementary Data ....................................................... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............. 52 PART III Item 10. Directors and Executive Officers of the Registrant ................................................ 53 Item 11. Executive Compensation ............................................................................ 53 Item 12. Security Ownership of Certain Beneficial Owners and Management .................................... 53 Item 13. Certain Relationships and Related Transactions .................................................... 53 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................................. 54
1 PART I Item 1. Business. GENERAL General Electric Capital Corporation (herein, together with its consolidated affiliates, called "the Corporation" or "GE Capital" unless the context otherwise requires) was incorporated in 1943 in the State of New York under the provisions of the New York Banking Law relating to investment companies, as successor to General Electric Contracts Corporation, which was formed in 1932. Until November 1987, the name of the Corporation was General Electric Credit Corporation. On July 2, 2001, GE Capital changed its state of incorporation to Delaware. All outstanding common stock of the Corporation is owned by General Electric Capital Services, Inc. ("GE Capital Services"), formerly General Electric Financial Services, Inc., the common stock of which is in turn wholly owned directly or indirectly by General Electric Company ("GE Company" or "GE"). The business of the Corporation originally related principally to financing the distribution and sale of consumer and other products of GE Company. Currently, however, the types and brands of products financed and the services offered are significantly more diversified. Very few of the products financed by GE Capital are manufactured by GE Company. GE Capital operates in five key operating segments that are described below. These operations are subject to a variety of regulations in their respective jurisdictions. Services of the Corporation are offered primarily in the United States, Canada, Europe and the Pacific Basin. The Corporation's principal executive offices are located at 260 Long Ridge Road, Stamford, Connecticut 06927 (Telephone number (203) 357-4000). At December 31, 2001, the Corporation employed approximately 88,000 persons. The Corporation's principal assets are classified as time sales and loans, investment in financing leases, equipment on operating leases and investment securities. The following table presents, by operating segment, these principal assets which, together with other assets, constitute the Corporation's total assets at December 31, 2001 and 2000. 2
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES FINANCIAL INFORMATION BY OPERATING SEGMENT (In millions) 2001 ------------------------------------------------------------ Time Net sales investment Allowance and Net in for loans, investment equipment losses net of in on and all deferred financing operating Investment other Total income leases leases securities assets assets --------- ---------- --------- ---------- --------- -------- CONSUMER SERVICES GE Financial Assurance .......... $ - $ - $ - $ 62,662 $ 36,589 $ 99,251 Auto Financial Services ......... 496 1,567 157 95 568 2,883 GE Card Services ................ 10,857 1 - 697 6,669 18,224 Global Consumer Finance ......... 31,141 4,635 2 305 5,679 41,762 Other............................ 1,827 313 7 355 574 3,076 --------- ---------- --------- ---------- --------- -------- Total ........................ 44,321 6,516 166 64,114 50,079 165,196 EQUIPMENT MANAGEMENT Aviation Services ............... 2,087 6,483 11,990 920 2,443 23,923 Fleet Services .................. 200 4,687 2,158 12 2,026 9,083 Information Technology Solutions ....................... - 105 22 - 2,099 2,226 Transport International Pool / Modular Space................ 93 419 5,295 - 1,754 7,561 GE SeaCo......................... 11 241 794 21 284 1,351 Penske Truck Leasing ............ - - - - 4,820 4,820 GE American Communications....... - - - - - - Other ........................... - 770 2,296 - 165 3,231 --------- ---------- --------- ---------- --------- -------- Total ........................ 2,391 12,705 22,555 953 13,591 52,195 MID-MARKET FINANCING Commercial Equipment Financing .. 20,527 15,617 3,218 248 5,429 45,039 Commercial Finance .............. 15,400 1 - 96 1,010 16,507 Vendor Financial Services ....... 5,794 6,066 458 69 2,859 15,246 GE European Equipment Finance ... 1,183 6,203 182 - 894 8,462 Heller Financial................. 14,095 1,903 605 837 5,335 22,775 Other............................ 116 - - - 43 159 --------- ---------- --------- ---------- --------- -------- Total ........................ 57,115 29,790 4,463 1,250 15,570 108,188 SPECIALIZED FINANCING Real Estate ..................... 11,548 969 - 113 7,376 20,006 Structured Finance Group ........ 5,212 5,356 135 1,345 4,393 16,441 GE Equity ....................... 80 - - 439 3,054 3,573 Other............................ - - - 125 24 149 --------- ---------- --------- ---------- --------- -------- Total ........................ 16,840 6,325 135 2,022 14,847 40,169 SPECIALTY INSURANCE ............. - - - 9,494 4,082 13,576 ALL OTHER........................ 41 - (5) 890 826 1,752 --------- ---------- --------- ---------- --------- -------- TOTAL ........................ $ 120,708 $ 55,336 $ 27,314 $ 78,723 $ 98,995 $381,076 ========= ========== ========= ========== ========= ========
(In millions) 2000 ------------------------------------------------------------ Time Net sales investment Allowance and Net in for loans, investment equipment losses net of in on and all deferred financing operating Investment other Total income leases leases securities assets assets --------- ---------- --------- ---------- --------- -------- CONSUMER SERVICES GE Financial Assurance .......... $ - $ - $ - $ 55,532 $ 39,625 $ 95,157 Auto Financial Services ......... 1,639 4,353 412 155 431 6,990 GE Card Services ................ 13,110 1 - 412 6,148 19,671 Global Consumer Finance ......... 25,562 4,390 10 183 4,896 35,041 Other............................ 1,673 252 15 321 499 2,760 --------- ---------- --------- ---------- --------- -------- Total ........................ 41,984 8,996 437 56,603 51,599 159,619 EQUIPMENT MANAGEMENT Aviation Services ............... 1,223 4,636 9,403 242 2,425 17,929 Fleet Services .................. 96 4,201 2,132 15 2,010 8,454 Information Technology Solutions ....................... - 170 29 1 3,195 3,395 Transport International Pool / Modular Space................. 53 331 5,086 - 1,737 7,207 GE SeaCo......................... 13 197 1,186 24 172 1,592 Penske Truck Leasing ............ - - - - 4,206 4,206 GE American Communications....... - - - - 2,268 2,268 Other ........................... - 505 2,359 - 166 3,030 --------- ---------- --------- ---------- --------- -------- Total ........................ 1,385 10,040 20,195 282 16,179 48,081 MID-MARKET FINANCING Commercial Equipment Financing .. 16,440 14,468 2,722 91 1,747 35,468 Commercial Finance .............. 13,234 - - 136 2,241 15,611 Vendor Financial Services ....... 4,246 6,191 569 20 2,245 13,271 GE European Equipment Finance ... 693 5,372 114 - 592 6,771 Heller Financial................. - - - - - - Other............................ 127 - - - 47 174 --------- ---------- --------- ---------- --------- -------- Total ........................ 34,740 26,031 3,405 247 6,872 71,295 SPECIALIZED FINANCING Real Estate ..................... 11,269 994 2 434 7,320 20,019 Structured Finance Group ........ 3,185 4,848 168 1,439 2,417 12,057 GE Equity ....................... 49 - - 355 4,178 4,582 Other............................ - - - 238 21 259 --------- ---------- --------- ---------- --------- -------- Total ........................ 14,503 5,842 170 2,466 13,936 36,917 SPECIALTY INSURANCE ............. 90 - - 9,549 4,058 13,697 ALL OTHER........................ 838 21 (62) 1,135 1,095 3,027 --------- ---------- --------- ---------- --------- -------- TOTAL ........................ $ 93,540 $ 50,930 $ 24,145 $ 70,282 $ 93,739 $332,636 ========= ========== ========= ========== ========= ========
3 OPERATING SEGMENTS The Corporation provides a wide variety of financing, asset management, and insurance products and services which are organized into the following operating segments: - - Consumer Services - private-label credit card loans, personal loans, time sales and revolving credit and inventory financing for retail merchants, auto leasing and inventory financing, mortgage servicing, retail businesses and consumer savings and insurance services. - - Equipment Management - leases, loans, sales and asset management services for portfolios of commercial and transportation equipment, including aircraft, trailers, auto fleets, modular space units, railroad rolling stock, data processing equipment and marine shipping containers. - - Mid-Market Financing - loans, financing and operating leases, and other services for middle-market customers, including manufacturers, distributors and end-users, for a variety of equipment that includes vehicles, corporate aircraft, data processing equipment, medical and diagnostic equipment, and equipment used in construction, manufacturing, office applications, electronics and telecommunications activities. - - Specialized Financing - loans and financing leases for major capital assets, including industrial facilities and equipment, and energy-related facilities; commercial and residential real estate loans and investments; and loans to and investments in public and private entities in diverse industries. - - Specialty Insurance - financial guaranty insurance, principally on municipal bonds and asset-backed securities; and private mortgage insurance. Refer to Item 7, "Management's Discussion and Analysis of Results of Operations," in this Annual Report on Form 10-K for a discussion of the Corporation's Portfolio Quality. A description of the Corporation's principal businesses by operating segment follows. CONSUMER SERVICES GE Financial Assurance GE Financial Assurance ("GEFA") provides consumers financial security solutions by selling a wide variety of insurance, investment and retirement products, payment protection insurance and income protection packages, primarily in North America, Europe and Asia. These products help consumers invest, protect and retire and are sold through a family of regulated insurance and annuity affiliates. GEFA's principal product lines in North America and Asia are annuities (deferred and immediate, fixed and variable), life insurance (universal, term, ordinary and group), guaranteed investment contracts including funding agreements, long-term care insurance, accident and health insurance, personal lines of automobile insurance and consumer club memberships. GEFA's principal product lines and services in Europe are payment protection insurance (designed to protect customers' loan repayment obligations), personal investment products, and travel and personal accident insurance, as well as management of uninsured loss claims on behalf of victims of traffic accidents. GEFA's product distribution in North America, Europe and Asia is accomplished primarily through four channels: intermediaries (brokerage general agencies, banks and securities brokerage firms), dedicated sales forces and financial advisors, worksites, and direct and affinity based marketing (through the Internet, telemarketing, and direct mail). GEFA's principal operating affiliates include General Electric Capital Assurance Company, First Colony Life Insurance Company, Federal Home Life Insurance Company, GE Life and Annuity Assurance Company, GE Edison Life Insurance Company, GE Insurance Holding Limited and GE Life Group Limited. GEFA recognizes that consolidation in the financial services industry will create fewer but larger competitors. GEFA believes that the principal competitive factors in the sale of insurance and investment products are product features, commission structure, perceived stability of the insurer, claims paying ability ratings, service, name recognition, price and cost efficiency. GEFA's ability to compete is affected by its ability to provide competitive products and quality service to the consumer, general agents, licensed insurance agents and brokers; to maintain operating scale; and to continually reduce its expenses through the elimination of duplicate functions and enhanced technology. Many of GEFA's activities are regulated by a variety of insurance and other regulators. GEFA headquarters are in Richmond, Virginia. 4 Auto Financial Services GE Capital Auto Financial Services ("AFS") provided financial services in North America to automobile dealers, manufacturers, banks, financing companies and the consumer customers of those entities, both through traditional channels and through the Internet. In the United States, AFS was a leading independent provider of leases for new and used motor vehicles and of non-prime financing products. In addition, AFS offered inventory financing programs, off-lease vehicle sales, productivity enhancing Internet solutions, and direct loans to the industry. On November 29, 2000, AFS announced its decision to discontinue originating new lease, loan and commercial transactions effective December 1, 2000. Since that date, AFS operations have consisted of servicing their existing portfolios and re-marketing off-lease vehicles. AFS headquarters are in Barrington, Illinois. GE Card Services GE Card Services ("CS") is a leading provider of sales financing services to North American retailers in a broad range of consumer industries. Details of financing plans differ, but include customized private-label credit card programs with retailers and inventory financing programs with manufacturers, distributors and retailers. CS offers customized private-label credit card solutions designed to attract and retain customers for retailers such as JC Penney, ExxonMobil, Wal-Mart, The Home Depot, Sam's Club, Macy's and Lowe's. CS provides financing directly to customers of retailers or purchases the retailers' customer receivables. Most of the retailers sell a variety of products of various manufacturers on a time sales basis. The terms for these financing plans differ according to the size of contract and credit standing of the customer. Financing is provided to consumers under contractual arrangements, both with and without recourse to retailers. CS' wide range of financial services includes application processing, sales authorization, statement billings, customer services and collection services. CS provides inventory financing for retailers primarily in the appliance and consumer electronics industries. CS maintains a security interest in the inventory financed and retailers are obliged to maintain insurance coverage for the merchandise financed. Additionally, CS issues and services the GE Capital Corporate Card product, providing payment and information systems which help medium and large-sized companies reduce travel costs, and the GE Capital Purchasing Card product, which helps customers streamline their purchasing and accounts payable processes. CS competes in the unsecured consumer lending market, doing business principally in the United States and Canada. CS' operations are subject to a variety of bank and consumer protection regulations. The unsecured consumer lending market's principal methods of competition are price, servicing capability including Internet value added e-services and risk management capability. The unsecured consumer lending market is subject to various risks including declining retail sales, increases in personal bankruptcy filings, increasing payment delinquencies and rising interest rates. CS headquarters are in Stamford, Connecticut. Global Consumer Finance GE Capital Global Consumer Finance ("GCF") is a leading provider of credit and insurance products and services to non-U.S. retailers and consumers. GCF provides private-label credit cards and proprietary credit services to retailers in Europe, Asia and, to a lesser extent, Central and South America, including Tesco, The Home Depot, Metro, and Wal-Mart, as well as offering a variety of direct-to-consumer credit programs such as consumer loans, auto loans and finance leases, mortgages, debt consolidation, bankcards and the distribution of credit insurance. GCF provides financing to consumers through operations in Argentina, Australia, Austria, Brazil, the Caribbean, the Czech Republic, Denmark, France, Germany, Hong Kong, Hungary, India, Indonesia, Italy, Japan, Korea, Mexico, New Zealand, Norway, Poland, Portugal, Republic of Ireland, Slovakia, Spain, Sweden, Switzerland, Taiwan, Thailand, and the United Kingdom. In March, May and September 2001, GCF closed transactions increasing a former minority interest in Budapest Bank in Hungary to a 99% majority holding. Budapest Bank is a commercial and retail bank offering a variety of consumer and small business financing products and new services such as electronic banking. In June 2001, GCF acquired igroup Limited, a leading provider of mortgage and debt consolidation products to the UK market, which is based in Watford, England. 5 GCF's operations are subject to a variety of bank and consumer protection regulations in their respective jurisdictions and a number of countries have ceilings on rates chargeable to consumers in financial service transactions. The consumer lending market is also subject to the risk of declining retail sales, changes in interest and currency exchange rates, increases in personal bankruptcy filings and payment delinquencies. The businesses in which GCF engages are subject to competition from various types of financial institutions including commercial banks, leasing companies, consumer loan companies, independent finance companies, manufacturers' captive finance companies, and insurance companies. Cross selling multiple products into its customer base is a critical success factor for GCF. GCF headquarters are in Stamford, Connecticut. Mortgage Services GE Capital Mortgage Services, Inc. ("Mortgage Services") engaged primarily in the business of originating, purchasing, selling and servicing residential mortgage loans collateralized by one-to-four-family homes located throughout the United States. Mortgage Services obtained servicing through the origination and purchase of mortgage loans and servicing rights, and primarily packaged the loans it originated and purchased into mortgage-backed securities which it sold to investors. Mortgage Services also originated and serviced home equity loans. On September 29, 2000, Mortgage Services closed on a transaction with a major mortgage company, which is owned by a major national bank holding company, to subservice Mortgage Services' mortgage servicing portfolio and to acquire Mortgage Services' servicing facility and mortgage origination business. Mortgage Services retains its financial interest in the servicing portfolio and the related assets, which are now being managed by GE Capital Mortgage Insurance (see page 12) and the results of which are now included in the Specialty Insurance segment. As a result of this transaction, Mortgage Services exited the business of originating, purchasing and selling of residential mortgage loans. EQUIPMENT MANAGEMENT Aviation Services GE Capital Aviation Services ("GECAS"), the world's foremost aircraft leasing company, is a global commercial aviation financial services business that offers a broad range of financial products to airlines, aircraft operators, owners, lenders and investors. Financial solutions provided to customers include operating leases, sale/leasebacks, aircraft purchasing and trading, financing leases, engine/spare parts financing, pilot training, fleet planning and financial advisory services. GECAS owns approximately 1,000 aircraft and manages approximately 300 on behalf of third parties. In addition, it has planes on order or on option from Boeing, Airbus, Dornier, Embraer and Bombardier. GECAS has over 200 customers in over 60 countries. GECAS operates in a highly competitive area serving a cyclical industry that could further consolidate if airlines generally continue to weaken financially. The impact of the events of September 11 has hastened and deepened a downturn in the aviation industry served by GECAS. The business can also be affected by regulatory changes that may impact aircraft values. Regulations under current consideration, if enacted, that reduce permissible noise levels emitted from commercial aircraft would have an effect on aircraft values. GECAS headquarters are in Stamford, Connecticut, with regional offices in Shannon, Republic of Ireland; New York, New York; Miami, Florida; Chicago, Illinois; Vienna, Austria; Toulouse, France; Luxembourg; Beijing and Hong Kong, China; Tokyo, Japan; and Singapore. Fleet Services GE Capital Fleet Services ("Fleet") is one of the leading corporate fleet management companies with operations in North America, Europe, Australia, New Zealand and Japan and has approximately 1.2 million cars and trucks under lease and service management. Fleet offers finance and operating leases to several thousand customers. The business via Web applications and other unique channels, delivers productivity solutions that drive commercial vehicle cost savings to company fleets of all sizes. The primary product in North America is a terminal rental adjustment clause lease through which the customer assumes the residual risk - that is, risk that the book value will be greater than market value at lease termination. In Europe, the primary product is a closed-end lease in which Fleet assumes residual risk. In addition to the services directly associated with the lease, Fleet offers value-added fleet management services designed to reduce customers' total fleet management costs. These services include, among others, web-based 6 vehicle ordering and reporting, maintenance management programs, accident services, national account purchasing programs, fuel programs, title and licensing services and strategic cost analysis consulting. Fleet's customer base is diversified with respect to industry and geography and includes many Fortune 500 companies. Fleet competes both on a local and global basis with other leasing businesses of various sizes as well as automobile manufacturers in some parts of the world. The industry is dependent upon the attractiveness of leasing and fleet management as a viable alternative for customers, along with the stability of new and used car prices. Future success will depend upon the ability to maintain a large and diverse customer portfolio, to estimate used car prices as well as mitigate the impact of fluctuations in those prices, and to continue to understand and deliver unique product and service offerings to the customers in the most efficient and cost effective manner possible. Fleet headquarters are in Eden Prairie, Minnesota. Information Technology Solutions GE Capital Information Technology Solutions ("IT Solutions") is a provider of a broad array of information technology products and services, including full life cycle services that provide customers with cost-effective control and management of their information systems. Products offered include desktop personal computers, client server systems, UNIX systems, local and wide area network hardware, and software. Services offered include network design, network support, asset management, help desk, disaster recovery, enterprise management and financial services. IT Solutions serves commercial, educational and governmental customers in 13 countries. During 2001, IT Solutions exited, including through sales of portions of business units, its operations in France and the United Kingdom. The worldwide competition in information technology products and services is intense. Competition is very active in all products and services and comes from a number of principal manufacturers and other distributors and resellers of information technology products. Markets for products and services are highly price competitive. Additionally, many information technology product manufacturers are bypassing traditional information technology resellers in favor of direct manufacturer relationships with the ultimate end-users. IT Solutions' North American headquarters are in Newport, Kentucky; its European headquarters are in Munich, Germany. Transport International Pool/Modular Space In April, 1999, Transport International Pool and GE Capital Modular Space were consolidated to generate cost savings and management synergies. This merger has resulted in the elimination of duplicate support functions and the integration of back offices. Transport International Pool ("TIP") is one of the global leaders in renting, leasing, selling and financing transportation equipment. With more than 40 years of experience in the renting, leasing and selling of trailers, TIP's mission is to provide customers with products and services that help them increase productivity and lower operating costs. TIP's fleet of over 390,000 dry freight, refrigerated and double vans, flatbeds, intermodal assets, and specialized trailers is available for rent, lease or purchase at over 200 locations in the United States, Europe, Canada, and Mexico. TIP's commercial vehicle fleet of over 35,000 units is available for rent, lease, or purchase in the United Kingdom. TIP also finances new and used trailers and buys trailer fleets. TIP's customer base comprises trucking companies, railroads, shipping lines, manufacturers and retailers. TIP's competitive environment is made up of a few large national competitors and many smaller, often changing regional players. TIP is a major participant in the transportation renting, leasing, selling and financing market. The industry is characterized by thin operating margins and continued consolidation of companies, with their volume driven by the gross domestic product and their costs affected by fuel prices and driver labor. The ability to remain competitive will require the continued expansion of value-added services around the core business of renting, leasing and financing transportation equipment. GE Capital Modular Space ("Modular Space") provides commercial mobile and modular structures for rental, lease and sale from over 100 facilities in the United States, Europe, Canada and Mexico. The buildings are provided with flexible customized financing, turnkey services and dedicated local sales staff. The primary markets served include construction, education, healthcare, financial, commercial, institutional and government. Modular Space products are available as custom mobile and modular buildings, designed to customer specifications, or are available through the Modular Space stock fleet of approximately 120,000 mobile and modular units. Competition consists primarily of national modular companies and regional/local competitors who provide services in selected territories. Modular Space also competes with construction companies on permanent structure opportunities. 7 Competitive factors for rental and lease customers include price, condition and availability of local fleet. Factors for custom and fleet sales opportunities include price, alternative solutions, and delivery. TIP/Modular Space have offices in North America and Europe. The world headquarters for TIP/Modular Space are in Devon, Pennsylvania. TIP/Modular Space European headquarters and pooled accounting service center are in Amsterdam, The Netherlands, and a commercial vehicle operation and administrative center is located in Manchester, England. GE SeaCo GE SeaCo SRL ("GE SeaCo") is a joint venture between GE Capital and Sea Containers Ltd., which operates the combined marine container fleets of Genstar Container Corporation ("Genstar") and Sea Containers Ltd. GE SeaCo is one of the world's largest lessors of marine shipping containers with a combined fleet of over 900,000 twenty foot equivalent units of dry cargo, refrigerated and specialized containers for global cargo transport. Lessees are primarily shipping lines that lease on a long term or master lease basis. The marine container leasing industry continues to be cyclical due to periods of excess capacity and changes in trade volumes. Further risk is attributable to the lessees, which are the major steamship lines and which exhibit cyclical results and generally weak financial condition, exposing GE SeaCo to customer credit risk. GE SeaCo is subject to asset value compression resulting from declining new container prices and positioning risk attributed to the increased use of one-way leases. GE SeaCo headquarters are in Bridgetown, Barbados. Penske Truck Leasing GE Capital is a limited partner in Penske Truck Leasing Co. L.P. ("Penske"), which is a leading provider of full-service truck leasing and commercial and consumer truck rental in the United States and Canada. Penske operates through a national network of full-service truck leasing and rental facilities. At December 31, 2001, Penske had a fleet of about 145,000 tractors, trucks and trailers in its leasing and rental fleets and provided contract maintenance programs or other support services for about 50,000 additional vehicles. Penske also provides dedicated logistics operations support which combines company-employed drivers with its full-service lease vehicles to provide dedicated contract carriage services. In addition, Penske offers supply chain services such as distribution consulting, warehouse management and information systems support. In February 2001, Penske acquired Rollins Truck Leasing Corporation for approximately $2 billion in cash and assumed debt. Rollins Truck Leasing Corporation was one of the largest national full-service truck leasing and rental companies, with locations in the United States and Canada. Penske competes with several other companies conducting nationwide truck leasing and rental operations, a large number of regional truck leasing companies, many similar companies operating primarily on a local basis and both local and nationwide common and contract carriers. On a nationwide basis, Penske offers full-service truck leasing, commercial and consumer rental and logistics services. In its leasing and support services, Penske competes primarily on the basis of customer service. Geographic location, price and equipment availability are also important competitive factors in this business. In its consumer rental operations, Penske competes primarily on the basis of equipment availability, price, geographic location and customer service. Penske headquarters are in Reading, Pennsylvania. GE American Communications GE American Communications ("Americom") engaged primarily as a satellite service supplier to a diverse array of customers, including the broadcast and cable TV industries, as well as broadcast radio. It also supplied integrated communications services for government and commercial customers. Americom also operated communications satellites and maintained a supporting network of earth stations, central terminal offices, and telemetry, tracking and control facilities. 8 On November 9, 2001, the Corporation exchanged the stock of Americom and other related assets and liabilities for a combination of cash and stock in SES Global ("SES"), a leading satellite company. As a result of the transaction, GE Capital now owns 30.7% of the combined operations of both Americom and SES. The investment in the combined entity is now part of the Structured Finance Group. Americom headquarters were in Princeton, New Jersey. Rail Services GE Capital Rail Services ("GERSCO") is one of the leading railcar leasing companies in North America, with a fleet of 190,000 railcars in its total portfolio. Serving Class 1 and short-line railroads and shippers throughout North America, GERSCO offers one of the most diverse fleets in the industry and a variety of lease options. GERSCO also owns and operates a network of railcar repair and maintenance facilities located throughout North America. The repair facilities offer a variety of services, ranging from light maintenance to heavy repair of damaged railcars. The company also provides railcar management, administration and other services. In addition, GERSCO is a pan-European provider of rail transport services, offering a broad range of railcar equipment and rail-related services to railroads, shippers and other transport providers. Traditional competitors include railroads, stand-alone leasing companies and other owners of railcar fleets, diversified financial institutions, and railcar builders. Customers who lease railcars also have the choice of purchasing them, either outright or through a financial sale. Certain segments of the North American railcar leasing industry continue to be affected by an oversupply of cars. Ongoing technology changes in car design and capacity are also impacting car supply. In Europe, liberalization and privatization of national railroads continue to significantly impact the rail industry. In addition, on both continents, changes in supply and demand for commodities shipped by rail also impact the demand for cars. In that regard, the trucking industries on both continents continue to make inroads into traditional haulage by rail. The interaction and timing of these forces across the portfolio of cars can impact the profitability of GERSCO. The ability to remain competitive will require the commitment to constant productivity gains and improvement in its breadth and quality of service through the implementation of technology and process improvements. European sales offices are in England, France, Germany, Italy and Sweden. GERSCO headquarters are in Chicago, Illinois. MID-MARKET FINANCING Commercial Equipment Financing GE Capital Commercial Equipment Financing ("CEF") offers large and small companies with a broad line of innovative financial solutions including leases and loans to middle-market customers, including manufacturers, distributors, dealers and end-users, as well as municipal financing and facilities financing, in such areas as construction equipment, corporate aircraft, medical equipment, trucks and trailers. It also furnishes customers with direct-source tax-exempt finance programs, as well as lease and sale/leaseback offerings. Products are either held for CEF's own account or brokered to third parties. Generally, transactions range in size from $50 thousand to $50 million, with financing terms from 36 to 180 months. CEF also maintains an asset management operation that redeploys off-lease and repossessed equipment and other assets. The global equipment financing industry continues to be highly fragmented and intensely competitive. Competitors in the U.S. domestic and international markets include independent financing companies, financing subsidiaries of equipment manufacturers, and banks (national, regional, and local). Industry participants compete not only on the basis of monthly payments, interest rates and fees charged customers but also on deal structures and credit terms. The profitability of CEF is affected not only by broad economic conditions that impact customer credit quality and the availability and cost of capital, but also by successful management of credit risk, operating risk and such market risks as interest rate and currency exchange risk. Important factors to continued success include maintaining strong risk management systems, diverse portfolios, service and distribution channels, strong collateral and asset management knowledge, deal structuring expertise and the reduction of costs through enhanced use of technology. During 2001, CEF purchased the stock of Franchise Finance Corporation of America and certain assets and liabilities from Mellon Financial Corporation and SAFECO Corporation. The purchase price for these acquisitions amounted to approximately $4.4 billion. 9 CEF operates from offices throughout the Americas, Europe, Asia and Australia and through joint ventures in Indonesia and China. CEF headquarters are in Danbury, Connecticut. Commercial Finance GE Capital Commercial Finance ("CF") is a leading global provider of innovative financing, primarily revolving and term debt and equity to finance acquisitions, business expansion, bank refinancings, recapitalizations and other special situations. Products also include asset securitization facilities, capital expenditure lines and bankruptcy-related facilities, as well as factoring services. Loan transactions range in size from under $10 million to over $200 million. CF's clients are owners, managers and buyers of both public and private companies, principally manufacturers, distributors, retailers and diversified service providers, and CF has industry specialists in the retail, media and communications, and high technology industries. Through its Merchant Banking Group, CF provides senior debt, subordinated debt and bridge financing to buyout and private equity firms, and co-invests in equity with buying groups or invests directly on a select basis. The corporate financing business is characterized by intense competition from a variety of lenders and factoring services providers, including local, regional, national and international banks and non-bank financing institutions. Competition is based on interest rates, fees, credit terms, and transaction structures. In addition to these factors, successful management of credit risks within the existing customer loan portfolio also affects profitability. Important factors to continued success include maintaining deal structuring expertise, strong risk management systems, and collateral management knowledge. CF headquarters are in Stamford, Connecticut. CF has lending operations in 25 cities, including international offices in Canada, Mexico, Thailand, Korea, Australia, The Netherlands, and the United Kingdom, and also has significant factoring operations in the U.S., France, the United Kingdom and Italy serving U.S. and European companies. Vendor Financial Services GE Capital Vendor Financial Services ("VFS") provides financial solutions and services to over 100 equipment manufacturers and more than 4,500 dealers/distributors in North America, Europe and Asia (including Japan), enabling them to offer financing options to their customers. With nearly $20 billion in served assets, VFS helps its partners focus on their core businesses and improve sales by providing flexible financial solutions and services. Customers include major U.S. and non-U.S. manufacturers in a variety of industries including information technology, office equipment, healthcare, telecommunications, energy and industrial equipment. VFS establishes sales financing in two ways - by forming captive partnerships with manufacturers that do not have them, and by outsourcing captive partnerships from manufacturers that do (captive partnerships provide sales financing solely for products of a given manufacturer). VFS offers industry-specific knowledge, leading edge technology, leasing and equipment expertise, and global capabilities. In addition, VFS provides an expanding array of related financial services to customers, including trade payables services. In June 2001, VFS acquired the Manufacturer and Dealer Services business (MDS) of Mellon Leasing for approximately $480 million. MDS provides financial services for office equipment and industrial equipment manufacturers. In September 2001, VFS signed a framework agreement with Xerox to form a Joint Venture, Xerox Capital Services. Through this joint venture, VFS will become the primary financing provider for Xerox customers across the United States. An economic slowdown would impact the continued expansion of the equipment financing industry, intensifying a competitive pricing environment, pressure delinquencies and residual realizations, and pressure any recourse obligations from vendor relationships. The ability to remain competitive will depend upon, among other things, the ability to drive down costs through the significant investment in productivity initiatives and the ability to continue to effectively manage its spread of risk in industry sectors and equipment categories in conjunction with vendor partners. VFS has sales offices throughout the United States, Canada, Europe, Asia (including Japan), and Australia. VFS headquarters are in Danbury, Connecticut. GE European Equipment Finance GE European Equipment Finance ("EEF") is one of Europe's leading diversified equipment leasing businesses, offering financial solutions on a single-country and pan-European basis. Customers include manufacturers, vendors and end-users in industries such as office imaging, materials handling, corporate aircraft, 10 information technology, broadcasting, machine tools, telecommunications and transportation. Products and services include loans, leases, master lease coordination and other services, such as helping end-users increase purchasing power through financing options and helping manufacturers and vendors to offer leasing programs. For financial reporting purposes, EEF's operating results are allocated to CEF and VFS. EEF is subject to competition from various types of financial institutions, including leasing companies, commercial and investment banks, and finance companies associated with manufacturers. Consolidation in the financial services industry will create fewer but larger competitors. EEF continues to be impacted by pricing pressures, slow growth in some of its markets, and is directly affected by the general economic conditions within country economies. Its ability to effectively compete in a changing environment will be dependent upon, among other things, its ability to increase productivity and offer innovative financial products and services. Operations are subject to varying degrees of regulation in several jurisdictions across the European continent. EEF operates from offices in the United Kingdom, France, Germany, Switzerland, Belgium, The Netherlands, Ireland, Italy, Spain, Norway, Denmark, Sweden and Finland, as well as having transaction capabilities in countries such as Portugal. EEF headquarters are in Hounslow, England. Heller Financial In October 2001, the Corporation acquired Heller Financial, Inc. ("Heller Financial") for approximately $5.3 billion. At December 31, 2001, the Corporation reported Heller Financial as a stand-alone entity within the Mid-Market Financing segment due to the proximity of the acquisition to year-end. During 2002, the Corporation will report Heller Financial's operations with those of the Corporation's businesses with which they were combined, primarily Commercial Finance, VFS and CEF. In addition, one of the strongest Heller Financial / GE Capital synergies was achieved when their healthcare businesses were combined to create a new business to meet the financial needs of the dynamic healthcare industry, Healthcare Financial Services. Overall, Heller Financial provides financing solutions to middle-market and small business clients including collateralized cash flow and asset based lending, secured real estate financing, debt and lease equipment financing and small businesses financing. Heller Financial originates transactions in the United States through its 62 domestic office locations and internationally through a network of wholly owned subsidiaries and joint venture commercial finance companies in 22 countries outside the United States. Heller Financial concentrates primarily on senior secured lending, with approximately 90% of consolidated lending assets and investments at December 31, 2001 being made on that basis. Heller Financial's primary clients and customers are entities in the manufacturing and service sectors having annual sales generally in the range of $5 million to $250 million and in the real estate sector having property values generally in the range of $1 million to $40 million. Heller Financial's markets are highly fragmented and extremely competitive and are characterized by competitive factors that vary by product and geographic region. Heller Financial's competitors include commercial finance companies, national and regional banks and thrift institutions, investment banks, leasing companies, investment companies, and manufacturers and vendors. Heller Financial competes primarily on the basis of pricing, terms, structure and service. Heller Financial's operations are subject, in certain instances, to supervision and regulation by state and federal governmental authorities. They may also be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things, regulate credit granting activities, establish maximum interest rates and finance charges, restrict foreign ownership or investment, govern secured transactions and set collection, foreclosure, repossession and claims handling procedures. Heller Financial headquarters are in Chicago, Illinois. SPECIALIZED FINANCING Real Estate GE Capital Real Estate ("Real Estate") provides funds for the acquisition, refinancing and renovation of a wide range of apartment buildings, industrial properties, multi-family housing, retail facilities and offices located throughout the United States, Canada, Mexico, Europe and Asia. Real Estate also provides asset management services to real estate investors and selected services to real estate owners. Real Estate is one of the world's leading providers of capital and services to the global commercial real estate market, providing debt and equity for real estate operators, developers, REITs and opportunity funds to allow them to meet their acquisition, refinancing and renovation needs. 11 Lending is a major portion of Real Estate's business in the form of intermediate-term senior or subordinated fixed and floating-rate loans secured by existing income-producing commercial properties such as office buildings, rental apartments, shopping centers, industrial buildings, mobile home parks, hotels and warehouses. Loans range in amount from single-property mortgages typically not less than $5 million to multi-property portfolios of several hundred million dollars. Approximately 90% of all loans are senior mortgages. Real Estate purchases and provides restructuring financing for portfolios of real estate, mortgage loans, limited partnerships, and tax-exempt bonds. Real Estate's business also includes the origination and securitization of low leverage real estate loans, which are intended to be held less than one year before outplacement. Additionally, Real Estate provides equity capital for real estate partnerships through the holding of limited partnership interests and receives preferred returns; typically such investments range from $2 million to $10 million. Real Estate also offers a variety of asset management services to outside investors, institutions, corporations, investment banks, and others through its real estate services subsidiaries. Asset management services include acquisitions and dispositions, strategic asset management, asset restructuring, and debt and equity management. In addition, Real Estate offers owners of multi-family housing ways to reduce costs and enhance value in properties by offering buying services (e.g., for appliances and roofing). Competition is intense in each of Real Estate's areas and across all product lines. Competitors include local, regional and, increasingly, multi-national lenders and investors. Important competitive factors in Real Estate's lending activities include financing rates, loan proceeds, loan structure and the ability to complete transactions quickly. Where Real Estate provides equity capital, principal competitive factors include the valuation of underlying properties and investment structure as well as transaction cycle time. Real Estate has offices throughout the United States, as well as in Canada, Mexico, Australia, Japan, Sweden, France, Spain, Germany, Italy and the United Kingdom. Real Estate headquarters are in Stamford, Connecticut. Structured Finance Group GE Capital Structured Finance Group ("SFG") provides innovative financial solutions through equity, debt and structured investments to clients throughout the world. SFG's clients are primarily in the energy, telecommunications, industrial and transportation sectors and range from household names to early stage businesses. SFG combines industry and technical expertise to deliver a full range of sophisticated financial services and products. Services include corporate finance, acquisition finance and project finance (construction and term). Products include a variety of debt and equity instruments, as well as structured transactions, including leases and partnerships. SFG manages an investment portfolio of approximately $17 billion. SFG's competition is diverse and global, ranging from large financial institutions to small niche capital providers. Additionally, two of SFG's client industry segments, telecommunications and energy, are faced with extraordinary challenges fostered by deregulation, globalization and technical innovation. Both of these industries have been recently experiencing significant volatility in demand for their products and services. The ability to remain competitive will require innovative and unique ways of providing capital, based on industry knowledge and competitive pricing, as well as the ability to properly assess credit risks and effectively manage portfolios. SFG headquarters are in Stamford, Connecticut, and it has offices in Chicago, Illinois; Houston, Texas; New York, New York; and San Francisco, California. Internationally, SFG is represented in London, United Kingdom; Frankfurt, Germany; Milan, Italy; Tokyo, Japan; and Mexico City, Mexico. GE Equity GE Equity purchases equity investments in early-stage, early growth, pre-IPO companies with a primary objective of long-term capital appreciation. GE Equity's portfolio consists primarily of direct investments in convertible preferred and common stocks in both public and private companies; GE Equity also participates in certain investment limited partnerships. The portfolio includes investments in the technology and communications, media and entertainment, business services, financial services and healthcare sectors. The portfolio is geographically diversified with investments located throughout the United States, as well as in Latin America, Europe and Asia. GE Equity operates in a highly competitive environment and competes with other domestic and foreign institutions. Competitors include corporate investors, private equity firms, investment banking companies, and a variety of other financial services and advisory companies. GE Equity seeks to develop meaningful business relationships with investees by offering GE's network of brands, services and management expertise. GE Equity's competitive environment is subject to the cyclical nature of the industries it invests in, as well as the momentum in the stock market. 12 GE Equity headquarters are in Stamford, Connecticut. SPECIALTY INSURANCE Financial Guaranty Insurance Company FGIC Holdings ("FGIC"), through its subsidiary, Financial Guaranty Insurance Company ("Financial Guaranty"), is an insurer of municipal bonds, including new issues, bonds traded in the secondary market and bonds held in unit investment trusts and mutual funds. Financial Guaranty also guarantees certain taxable structured debt. The in force guaranteed principal, after reinsurance, amounted to approximately $174 billion at December 31, 2001. Approximately 84% of the business written by Financial Guaranty is municipal bond insurance. FGIC subsidiaries provide a variety of services to state and local governments and agencies, liquidity facilities in variable-rate transactions, municipal investment products and other services. The municipal bond insurance business is fairly mature. This environment requires FGIC to place increasing emphasis on strategies that differentiate its offerings. Additionally, the stable nature of the industry continues to attract interest from potential new competitors, such as multi-line insurance companies. Important factors to continued success include maintaining strong capitalization, superior customer service and competitive pricing. FGIC headquarters are in New York, New York. Mortgage Insurance GE Capital Mortgage Insurance ("Mortgage Insurance") helps families become homeowners by smoothing the way for customers to obtain low-down-payment mortgages while protecting lenders and investors against the risks of default. It enables more than a quarter million families per year to obtain low-down-payment mortgages and now has a no-down-payment product as well. Mortgage Insurance is engaged principally in providing residential mortgage guaranty insurance in the United States, United Kingdom, Canada and Australia. At December 31, 2001, Mortgage Insurance was the mortgage insurance carrier for over 1.9 million residential homes, with total insurance in force aggregating approximately $184 billion and total risk in force aggregating approximately $80 billion. When a valid claim is received, Mortgage Insurance either pays up to a guaranteed percentage based on the specified coverage, or pays the mortgage and delinquent interest, taking title to the property and arranging for its sale. The mortgage insurance industry is sensitive to the interest rate environment and housing market conditions. The mortgage insurance industry is intensely competitive as excess market capacity seeks to underwrite business being generated from a consolidating customer base. In addition, considerable influence is exerted on the industry by two government-sponsored enterprises, which buy the majority of the loans insured by mortgage insurers. Mortgage Insurance headquarters are in Raleigh, North Carolina. OTHER Wards All other consists primarily of Montgomery Ward, LLC ("Wards") from August 2, 1999, when the Corporation acquired control of the retailer upon its emergence from bankruptcy reorganization, to December 28, 2000, when Wards again filed for bankruptcy protection. The retailer is substantially liquidated. REGULATIONS AND COMPETITION The Corporation's activities are subject to a variety of federal and state regulations including, at the federal level, the Consumer Credit Protection Act, the Equal Credit Opportunity Act and certain regulations issued by the Federal Trade Commission. A majority of states have ceilings on rates chargeable to customers in retail time sales transactions, installment loans and revolving credit financing. Insurance and reinsurance operations are subject to regulation by various state insurance commissions or foreign regulatory authorities, as applicable. The Corporation's international operations are subject to regulation in their respective jurisdictions. To date, compliance with such regulations has not had a material adverse effect on the Corporation's financial position or results of operations. The businesses in which the Corporation engages are highly competitive. The Corporation is subject to competition from various types of financial institutions, including banks, thrifts, investment banks, broker-dealers, credit unions, leasing companies, consumer loan companies, independent finance companies, finance companies associated with manufacturers and insurance and reinsurance companies. 13 BUSINESS AND ECONOMIC CONDITIONS The Corporation's businesses are generally affected by general business and economic conditions in countries in which the Corporation conducts business. When overall economic conditions deteriorate in those countries, there generally are adverse effects on the Corporation's operations, although those effects are dynamic and complex. For example, a downturn in employment or economic growth in a particular national or regional economy will generally increase the pressure on customers, which generally will result in deterioration of repayment patterns and a reduction in the value of collateral. However, in such a downturn, demand for loans and other products and services offered by the Corporation may actually increase. Interest rates, another macro-economic factor, are important to the Corporation's businesses. In the lending and leasing businesses, higher real interest rates increase the Corporation's cost to borrow funds, but also provide higher levels of return on new investments. For the Corporation's operations that are less directly linked to interest rates, such as the insurance operations, rate changes generally affect returns on investment portfolios. FORWARD LOOKING STATEMENTS This document includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in global political, economic, business, competitive, market and regulatory factors. Item 2. Properties. The Corporation conducts its business from various facilities, most of which are leased. The locations of the Corporation's primary facilities are described in Item 1. Business. Item 3. Legal Proceedings. The Corporation is not involved in any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. Omitted. 14 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. See note 13 to the consolidated financial statements. The common stock of the Corporation is owned entirely by GE Capital Services and, therefore, there is no trading market in such stock. Item 6. Selected Financial Data. The following selected financial data should be read in conjunction with the financial statements of GE Capital and consolidated affiliates and the related Notes to Consolidated Financial Statements.
Year ended December 31 ----------------------------------------------------------------------------- (In millions) 2001 2000 1999 1998 1997 ------------- -------------- -------------- -------------- --------------- Revenues ............................... $ 48,545 $ 54,267 $ 46,605 $ 41,405 $ 33,404 Earnings before accounting changes ..... 6,060 4,289 4,208 3,374 2,729 Cumulative effect of accounting changes. (158) - - - - Net earnings............................ 5,902 4,289 4,208 3,374 2,729 Return on common equity (a) ............ 21.94% 18.97% 21.81% 20.33% 18.62% Ratio of earnings to fixed charges ..... 1.72 1.52 1.60 1.50 1.48 Ratio of earnings to combined fixed charges and preferred stock dividends ............................ 1.70 1.50 1.58 1.48 1.46 Ratio of debt to equity ................ 7.31 7.53 8.44 7.86 7.45 Financing receivables - net ............ $ 171,301 $ 140,500 $ 132,023 $ 118,098 $ 101,133 Total assets ........................... 381,076 332,636 307,441 269,050 228,777 Short-term borrowings................... 154,124 117,482 123,073 107,419 91,680 Long-term senior notes ................. 75,601 78,078 68,164 57,486 44,437 Long-term subordinated notes ........... 873 698 698 697 697 Minority interest ...................... 1,650 1,344 1,767 1,137 860 Share owners' equity ................... 31,563 26,073 22,746 21,069 18,373
(a) Common equity excludes unrealized gains and losses on investment securities and derivatives qualifying as hedges, net of tax. Return on common equity is calculated using earnings that are adjusted for preferred stock dividends and common equity excludes preferred stock. Item 7. Management's Discussion and Analysis of Results of Operations. Overview The Corporation's earnings before accounting changes were $6,060 million in 2001, up 41% from $4,289 million in 2000, with strong double-digit earnings growth in four of the five operating segments. Net earnings in 2000 increased 2% from 1999. Earnings growth throughout the three-year period resulted from origination volume and asset growth, productivity and acquisitions of businesses and portfolios. Principal factors in the 2001 increase were strong productivity ($0.7 billion) partially offset by lower realized gains on financial instruments. Excluding effects of Paine Webber Group, Inc. (PaineWebber) in 2000 and Americom in 2001, both of which are discussed below, such pre-tax gains were lower in 2001 by $0.4 billion ($0.3 billion after tax). Pre-tax gains on sales of investment securities declined in 2001 by $0.4 billion, of which $0.4 billion related to GE Equity; other GE Equity gains were $0.8 billion lower; while gains on securitizations were up $0.8 billion from 2000. On November 9, 2001, the Corporation exchanged the stock of Americom and other related assets and liabilities for a combination of cash and stock in SES Global, a leading satellite company. The transaction resulted in a gain of $1,158 million ($642 million after tax). On December 28, 2000, Montgomery Ward, LLC (Wards), formerly a GE Capital subsidiary, filed for bankruptcy protection and began liquidation proceedings. Net earnings for the year 2000 included operating losses from Wards amounting to $245 million as well as a charge, primarily to other costs and expenses, for $815 million ($537 million after tax) to recognize the additional associated losses. 15 Operating Results Total Revenues decreased 11% to $48.5 billion in 2001, following a 16% increase to $54.3 billion in 2000. The three principal reasons for the decrease in revenues in 2001 compared with 2000 were: the deconsolidation of Wards and resulting absence of sales in 2001 ($3.2 billion); the effects of rationalization of operations and market conditions at IT Solutions ($2.9 billion); and reduced surrender fees compared with 2000 ($1.2 billion) associated with the planned run-off of restructured insurance policies of Toho Mutual Life Insurance Company (Toho) at GE Financial Assurance (GEFA). The increase in 2000 reflected post-acquisition revenues from acquired businesses ($6.1 billion) as well as volume growth ($1.4 billion). Revenues in 2000 also included a gain of $219 million ($133 million, after tax) from sale of the Corporation's investment in common stock of PaineWebber. Additional information about other revenue items is provided in the analysis of the Corporation's operating segments beginning on page 16. Interest expense on borrowings in 2001 was $10.0 billion, compared with $10.5 billion in 2000 and $8.9 billion in 1999. The change in both years reflected the effects of both interest rates and the average level of borrowings used to finance asset growth. The average composite effective interest rate was 5.11% in 2001, compared with 5.84% in 2000 and 5.11% in 1999. In 2001, average assets of $345.8 billion were 7% higher than in 2000, which in turn were 14% higher than in 1999. See page 21 for a discussion of interest rate risk management. Operating and administrative expenses were $13.5 billion, $16.4 billion and $13.5 billion in 2001, 2000 and 1999, respectively. Changes over the three-year period were largely the result of acquisitions and unusual charges, which were more than offset in 2001 by productivity at Consumer Services and Equipment Management. Costs and expenses in 2001 included $0.4 billion of costs in businesses that were acquired after January 1, 2001, as well as $0.3 billion of costs discussed in the analysis of the All Other operating segment. Similarly, 2000 included $2.2 billion of costs in businesses that were acquired after January 1, 2000; charges for costs associated with Wards amounting to $0.8 billion, as discussed previously; and $0.5 billion of costs to rationalize certain operations discussed in the analysis of the All Other operating segment. Insurance losses and policyholder and annuity benefits increased to $8.2 billion in 2001, compared with $7.7 billion in 2000 and $5.6 billion in 1999. This increase reflected effects of growth in premium volume and business acquisitions at GEFA throughout the period, partially offset by the planned run-off of restructured insurance policies at Toho. Cost of goods sold declined to $3.3 billion in 2001, compared with $8.5 billion in 2000 and $8.0 billion in 1999, reflecting volume declines at IT Solutions and the deconsolidation of Wards on December 28, 2000, when Wards commenced liquidation proceedings. The increase in 2000 primarily reflected the consolidation of Wards from August 2, 1999, through December 28, 2000. Provision for losses on financing receivables was $2.3 billion in 2001, compared with $2.0 billion in 2000 and $1.7 billion in 1999. These provisions principally related to private-label credit cards, bank credit cards, personal loans and auto loans and leases as well as commercial, industrial, and equipment loans and leases, all of which are discussed on page 19 under Portfolio Quality. The provision throughout the three-year period reflected higher average receivable balances, changes in the mix of business, and the effects of delinquency rates - higher during 2001 and lower during 2000 - consistent with industry experience. Depreciation and amortization of buildings and equipment and equipment on operating leases increased 4% to $3.4 billion in 2001, compared with $3.3 billion in 2000, a 5% increase over 1999. The increase in both years was primarily the result of higher levels of short-lived equipment on operating leases, primarily reflecting acquisitions of vehicles and aircraft. Provision for income taxes was $1.7 billion in 2001 (an effective tax rate of 22.2%), compared with $1.6 billion in 2000 (an effective tax rate of 26.6%) and $1.6 billion in 1999 (an effective tax rate of 27.0%). The 2001 effective tax rate reflects the effects of continuing globalization and certain transactions (see note 15). Management expects that trends in the Corporation's businesses, particularly the continuing impact of globalization, are likely to result in an effective tax rate for the Corporation in 2002 that will be lower than the 2000 and 1999 rates, but higher than the 2001 rate. Financing Spreads - Over the last three years, market interest rates have been more volatile than the average composite effective interest rates of the Corporation, principally because of the mix of effectively fixed-rate borrowings in the Corporation's financing structure. The Corporation's portfolio of fixed and floating-rate financial products has behaved similarly over that period. Consequently, financing spreads have remained relatively flat over the three-year period. 16 Operating Segments Revenues and earnings before accounting changes of the Corporation, by operating segment, for the past three years are summarized and discussed as follows. For additional information, see note 16 to the consolidated financial statements. Consolidated
(In millions) 2001 2000 1999 -------------- -------------- ----------- Revenues Consumer Services .......................... $ 23,033 $ 23,439 $ 18,659 Equipment Management ....................... 12,486 14,677 15,329 Mid-Market Financing ....................... 8,585 6,952 5,884 Specialized Financing ...................... 2,927 4,028 3,250 Specialty Insurance ........................ 1,876 1,782 1,648 All other .................................. (362) 3,389 1,835 -------------- -------------- ----------- Total revenues .......................... $ 48,545 $ 54,267 $ 46,605 ============== ============== =========== Net earnings Consumer Services .......................... $ 2,224 $ 1,590 $ 1,138 Equipment Management ....................... 1,607 833 684 Mid-Market Financing ....................... 1,281 1,016 836 Specialized Financing ...................... 574 1,204 1,004 Specialty Insurance ........................ 688 404 541 All other .................................. (314) (758) 5 -------------- -------------- ------------ Total earnings before accounting changes.. 6,060 4,289 4,208 Cumulative effect of accounting changes... (158) - - -------------- -------------- ------------ Net earnings ............................ $ 5,902 $ 4,289 $ 4,208 ============== ============== ============
Following is a discussion of revenues and earnings before accounting changes from operating segments. For purposes of this discussion, earnings before accounting changes is referred to as net earnings. Consumer Services
(In millions) 2001 2000 1999 -------------- -------------- --------------- Revenues Global Consumer Finance...................... $ 5,282 $ 5,138 $ 4,839 GE Financial Assurance....................... 13,537 13,641 9,585 GE Card Services............................. 3,434 3,465 2,451 Other Consumer Services...................... 780 1,195 1,784 -------------- -------------- --------------- Total revenues ............................ $ 23,033 $ 23,439 $ 18,659 ============== ============== =============== Net earnings (a) Global Consumer Finance...................... $ 903 $ 710 $ 580 GE Financial Assurance....................... 687 564 411 GE Card Services............................. 559 414 195 Other Consumer Services...................... 75 (98) (48) -------------- -------------- --------------- Net earnings .............................. $ 2,224 $ 1,590 $ 1,138 ============== ============== ===============
(a) Charges of $196 million and $107 million in 2001 and 2000, respectively were not allocated to this segment and are included in the All Other operating segment. 17 Consumer Services revenues declined 2% in 2001, following a 26% increase in 2000. Overall, the revenue performance in both years reflected the post-acquisition revenues from acquired businesses and volume growth at GEFA, Global Consumer Finance and Card Services which were offset by decreases at Auto Financial Services and Mortgage Services, which both stopped accepting new business in 2000 (included in Other Consumer Services) and, in 2001, a decrease in surrender fee income at GEFA associated with the planned run-off of restructured insurance policies at Toho. Net earnings increased 40% in 2001 and in 2000. The increase in 2001 reflected productivity benefits at Global Consumer Finance and GEFA, volume growth at Card Services and reduced residual losses at Auto Financial Services. The increase in net earnings in 2000 resulted from acquisition and volume growth at Card Services, GEFA, and Global Consumer Finance, partially offset by losses at Mortgage Services. Equipment Management
(In millions) 2001 2000 1999 --------------- -------------- ----------------- Revenues Aviation Services (GECAS)................................. $ 2,173 $ 1,962 $ 1,551 Americom.................................................. 1,698 594 463 IT Solutions.............................................. 4,180 7,073 8,380 Other Equipment Management................................ 4,435 5,048 4,935 --------------- -------------- ----------------- Total revenues ......................................... $ 12,486 $ 14,677 $ 15,329 =============== ============== ================= Net earnings (a) Aviation Services (GECAS).................................. $ 470 $ 474 $ 280 Americom................................................... 896 195 150 IT Solutions............................................... 11 (197) (66) Other Equipment Management................................. 230 361 320 --------------- -------------- ----------------- Net earnings ............................................ $ 1,607 $ 833 $ 684 =============== ============== =================
(a) Charges of $135 million and $191 million in 2001 and 2000, respectively, were not allocated to this segment and are included in the All Other operating segment. Equipment Management revenues decreased 15% in 2001 following a 4% decline in 2000. The decrease in both years was primarily attributable to effects of rationalization of operations and market conditions on revenues at IT Solutions, partially offset by the gain on the disposition of Americom in 2001, and volume growth at GECAS in both years. Other Equipment Management revenues decreased in 2001, primarily as a result of lower volume across all of the remaining businesses. Net earnings increased 93% in 2001 and 22% in 2000, reflecting the Americom gain and productivity benefits at IT Solutions in 2001 and volume growth at GECAS in 2000. The decrease in Other Equipment Management net earnings in 2001 primarily reflected lower results at Transport International Pool and GE Capital Modular Space. Mid-Market Financing
(In millions) 2001 2000 1999 -------------- -------------- ----------------- Revenues Commercial Equipment Financing................................ $ 4,505 $ 3,610 $ 3,180 Commercial Finance............................................ 1,641 1,468 1,251 Vendor Financial Services..................................... 2,085 1,792 1,371 Other Mid-Market Financing.................................... 354 82 82 -------------- -------------- ----------------- Total revenues ............................................ $ 8,585 $ 6,952 $ 5,884 ============== ============== ================= Net earnings (a) Commercial Equipment Financing................................ $ 590 $ 496 $ 396 Commercial Finance............................................ 365 282 239 Vendor Financial Services..................................... 288 245 200 Other Mid-Market Financing.................................... 38 (7) 1 -------------- -------------- ----------------- Net earnings .............................................. $ 1,281 $ 1,016 $ 836 ============== ============== =================
(a) Charges of $52 million in 2001 were not allocated to this segment and are included in the All Other operating segment. 18 Mid-Market Financing revenues increased 23% in 2001, following a 18% increase in 2000, resulting from acquisition and volume growth at Commercial Equipment Financing, Vendor Financial Services and Commercial Finance, including the acquisition of Heller Financial on October 24, 2001, (included in Other Mid-Market Financing), and increased gains on securitizations of financial assets. The increase in revenues in 2000 primarily reflected asset growth from originations across all major businesses. Net earnings increased 26% in 2001 and 22% in 2000. Growth in net earnings in 2001 reflected securitization gains and asset growth from acquisitions across all major businesses. In 2000, improvements in net earnings resulted from favorable tax effects and asset growth from originations. Specialized Financing
(In millions) 2001 2000 1999 -------------- -------------- ---------------- Revenues Real Estate................................................ $ 1,093 $ 1,900 $ 1,524 Structured Finance Group................................... 1,857 999 812 GE Equity.................................................. (67) 1,079 863 Other Specialized Financing................................ 44 50 51 -------------- -------------- ---------------- Total revenues ......................................... $ 2,927 $ 4,028 $ 3,250 ============== ============== ================ Net earnings (a) Real Estate.................................................$ 465 $ 353 $ 285 Structured Finance Group.................................... 385 344 270 GE Equity................................................... (232) 525 416 Other Specialized Financing................................. (44) (18) 33 -------------- -------------- ---------------- Net earnings ........................................... $ 574 $ 1,204 $ 1,004 ============== ============== ================
(a) Charges of $103 million and $49 million in 2001 and 2000, respectively, were not allocated to this segment and are included in the All Other operating segment. Specialized Financing revenues declined 27%, following a 24% increase in 2000, and net earnings declined 52% in 2001 following a 20% increase in 2000. The decrease in revenues and net earnings in 2001 were a result of reduced asset gains at GE Equity, partially offset by profitable origination growth at Structured Finance Group and higher asset gains and productivity benefits at Real Estate. Revenues and net earnings growth in 2000 were principally the result of origination growth across all businesses and a particularly high level of gains on equity investment sales at GE Equity. Specialty Insurance
(In millions) 2001 2000 1999 -------------- -------------- ---------------- Revenues Mortgage Insurance......................................... $ 1,029 $ 973 $ 936 Other Specialty Insurance.................................. 847 809 712 -------------- -------------- ---------------- Total revenues .......................................... $ 1,876 $ 1,782 $ 1,648 ============== ============== ================ Net earnings (a) Mortgage Insurance......................................... $ 395 $ 366 $ 340 Other Specialty Insurance.................................. 293 38 201 -------------- -------------- ---------------- Net earnings ............................................ $ 688 $ 404 $ 541 ============== ============== ================
(a) Charges of $1 million in 2001 were not allocated to this segment and are included in the All Other operating segment. Specialty Insurance revenues increased 5% and 8% in 2001 and 2000, respectively, resulting from increased origination growth at Mortgage Insurance and increased revenues in the Other Specialty Insurance businesses, driven primarily by origination volume in municipal bond insurance at Financial Guaranty Insurance Company. Net earnings increased 70% in 2001, following a 25% decrease in 2000. The increase in 2001 primarily reflected favorable origination growth across all businesses. The 2000 decrease primarily reflected reduced earnings from bond refundings and a lower level of realized gains at Financial Guaranty Insurance Company and reserve strengthening at a public entity liability insurance company. In addition, net earnings in both years were favorably affected by improved conditions in the Mortgage Insurance businesses, resulting from favorable economic conditions, improvement in certain real estate markets and loss mitigation efforts. 19 All Other (In millions) 2001 2000 1999 --------------- -------------- -------------- Total revenues............... $ (362) $ 3,389 $ 1,835 =============== ============== ============== Total net earnings........... $ (314) $ (758) $ 5 =============== ============== ============== All Other includes results of operations of businesses other than those in the five operating segments as well as charges management has not allocated to those segments. In 2001, $354 million of charges, principally for asset write-downs, resulted in a negative total for this category. Revenues in 2000 included the results of Wards through December 28, 2000; a pre-tax gain of $219 million from sale of the Corporation's investment in common stock of PaineWebber; and charges of $238 million, principally for asset write-downs. The net loss of $314 million for 2001 included after-tax costs of $487 million in certain financing product lines that are being exited; in disposing of and providing for disposition of several nonstrategic investments and other assets; and in restructuring various global operations. These costs included asset write-downs totaling $231 million. The net loss of $758 million for 2000 comprised the PaineWebber gain of $133 million; charges of $537 million related to Wards; strategic rationalization costs of $347 million related to other operating segments, primarily for asset write-downs, employee severance and lease terminations; and operating losses from Wards of $245 million. Portfolio Quality Financing receivables is the largest category of assets of the Corporation and represents one of its primary sources of revenues. The portfolio of financing receivables, before allowance for losses, increased to $176.0 billion at the end of 2001 from $144.5 billion at the end of 2000, as discussed in the following paragraphs. The related allowance for losses at the end of 2001 amounted to $4.7 billion ($4.0 billion at the end of 2000), representing management's best estimate of probable losses inherent in the portfolio. A discussion of the quality of certain elements of the financing receivables portfolio follows. "Nonearning" receivables are those that are 90 days or more delinquent (or for which collection has otherwise become doubtful) and "reduced-earning" receivables are commercial receivables whose terms have been restructured to a below-market yield. Consumer financing receivables, primarily credit card and personal loans and auto loans and leases, were $50.8 billion at year-end 2001, an increase of $4.0 billion from year-end 2000. Credit card and personal receivables increased $7.5 billion, primarily from increased origination and acquisition growth, partially offset by sales and securitizations and the net effects of foreign currency translation. Auto receivables decreased $3.5 billion, primarily as a result of the run-off of the liquidating Auto Financial Services portfolio. Nonearning consumer receivables at year-end 2001 were $1.5 billion, about 3.0% of outstandings, compared with $1.0 billion, about 2.3% of outstandings at year-end 2000. Write-offs of consumer receivables increased to $1.6 billion from $1.3 billion for 2000, reflecting the maturing of private label credit card portfolios and higher personal bankruptcies on credit card loan portfolios in Japan. Consistent with industry trends, consumer delinquency rates increased during 2001. Other financing receivables, which totaled $125.2 billion at December 31, 2001, consisted of a diverse commercial, industrial and equipment loan and lease portfolio. This portfolio increased $27.5 billion during 2001, reflecting increased acquisition and origination growth, partially offset by sales and securitizations. Related nonearning and reduced-earning receivables were $1.7 billion, about 1.4% of outstandings at year-end 2001, compared with $0.9 billion, about 1.0% of outstandings at year-end 2000 reflecting several large bankruptcies and the current economic environment. These receivables are backed by assets and are covered by reserves for probable losses. The Corporation's loans and leases to commercial airlines amounted to $21.5 billion at the end of 2001, up from $15.3 billion at the end of 2000. The Corporation's commercial aircraft positions also included financial guarantees, funding commitments, credit and liquidity support agreements and aircraft orders as discussed in note 6. International Operations The Corporation's international operations include its operations located outside the United States and certain of its operations that cannot be meaningfully associated with specific geographic areas (for example, commercial aircraft). The Corporation's international revenues were $19.7 billion in 2001, a decrease of 10% from $21.9 billion in 2000. Revenues in the Pacific Basin decreased 19% in 2001, as 2000 revenues included surrender fee income at GEFA from the planned run-off of restructured insurance policies of Toho. Revenues in Europe decreased 8% in 2001 as acquisition and core growth at Global Consumer Finance were more than offset by reduced 20 revenues, associated with the rationalization of certain operations at IT Solutions. International assets grew 16%, from $124.5 billion at year-end 2000 to $144.6 billion at the end of 2001. The increase in 2001 primarily reflected growth in the Corporation's asset base. The Corporation's assets increased 19% in Europe, reflecting a mix of origination and acquisition growth. The Corporation also achieved significant asset growth at GECAS. The Corporation's activities span all global regions and primarily encompass leasing of aircraft and providing certain financial services within these regional economies. As such, when certain countries or regions such as the Pacific Basin and Latin America experience currency and/or economic stress, the Corporation may have increased exposure to certain risks but also may have new profit opportunities. Potential increased risks include, among other things, higher receivables delinquencies and bad debts, delays or cancellation of sales and orders principally related to aircraft, higher local currency financing costs and a slowdown in established financial services activities. New profit opportunities include, among other things, more opportunities for lower cost outsourcing, expansion of financial services activities through purchases of companies or assets at reduced prices and lower U.S. debt financing costs. Financial results reported in U.S. dollars are affected by currency exchange. A number of techniques are used to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. Principal currencies are the euro, the Japanese yen and the Canadian dollar. The Corporation's operations in Europe are all euro-capable as of January 1, 2002. Capital Resources and Liquidity Statement of Financial Position Investment securities for each of the past two years comprised mainly investment-grade debt securities held by GE Financial Assurance and the specialty insurance businesses of the Corporation in support of obligations to annuitants and policyholders. Investment securities were $78.7 billion in 2001, compared with $70.3 billion in 2000. The increase of $8.4 billion resulted from investment of premiums received, reinvestment of investment income, and the addition of securities from acquired companies, partially offset by sales and maturities as well as decreases in the fair value of certain debt and equity securities. A breakdown of the investment securities portfolio is provided in note 2 to the consolidated financial statements. Inventories were $270 million and $666 million at December 31, 2001 and 2000, respectively. The decrease in 2001 primarily reflected the rationalization of certain operations at IT Solutions, as well as improved inventory management. Financing receivables were $171.3 billion at year-end 2001, net of allowance for losses, up $30.8 billion over 2000. These receivables are discussed in the Portfolio Quality section and in notes 3 and 4 to the consolidated financial statements. Insurance receivables were $10.6 billion at year-end 2001, a decrease of $1.4 billion that was primarily attributable to the planned run-off of assets at Toho partially offset by core growth (see note 5). Other receivables totaled $15.1 billion at year-end 2001 and $14.3 billion at year-end 2000, and consists primarily of nonfinancing customer receivables, accrued investment income, amounts due from GE (generally related to certain trade payable programs), amounts due under operating leases, receivables due on sales of securities and various sundry items. Equipment on operating leases was $27.3 billion at December 31, 2001, up $3.2 billion from 2000. Details by category of investment can be found in note 6 to the consolidated financial statements. Additions to equipment on operating leases were $12.6 billion during 2001 ($11.4 billion during 2000), primarily reflecting acquisitions of transportation equipment. Intangible assets were $17.0 billion at year-end 2001, up from $13.2 billion at year-end 2000. The $3.8 billion increase in intangible assets related primarily to goodwill and other intangibles associated with acquisitions, the largest of which was the acquisition of Heller Financial, partially offset by amortization. Other assets totaled $52.0 billion at year-end 2001, compared with $48.1 billion at the end of 2000. The $3.9 billion increase was principally attributed to additional investments in associated companies and real estate, the recognition of all derivatives at fair value in accordance with SFAS 133, and increases in deferred insurance acquisition costs, partially offset by decreases in "separate accounts" (see note 9). 21 Borrowings were $230.6 billion at December 31, 2001, of which $154.1 billion is due in 2002 and $76.5 billion is due in subsequent years. Comparable amounts at the end of 2000 were $196.3 billion in total, $117.5 billion due within one year and $78.8 billion due thereafter. The Corporation's composite interest rates are discussed in the Interest Expense section of Operating Results. A large portion of the Corporation's borrowings ($110.9 billion and $88.1 billion at the end of 2001 and 2000, respectively) was issued in active commercial paper markets that management believes will continue to be a reliable source of short-term financing. The average remaining terms and interest rates of the Corporation's commercial paper were 46 days and 2.37% at the end of 2001, compared with 45 days and 6.43% at the end of 2000. The Corporation's ratio of debt to equity was 7.31 to 1 at the end of 2001 and 7.53 to 1 at the end of 2000. Insurance liabilities, reserves and annuity benefits were $82.2 billion, $2.3 billion higher than in 2000. The increase was primarily attributable to growth in deferred annuities and guaranteed investment contracts, partially offset by the planned run-off of policyholder contracts at Toho and decreases in separate accounts. For additional information on these liabilities, see note 11. Interest Rate and Currency Risk Management Interest rate and currency risk management is important in the normal business activities of the Corporation. Derivative financial instruments are used by the Corporation to mitigate or eliminate certain financial and market risks, including those related to changes in interest rates and currency exchange rates. As a matter of policy, the Corporation does not engage in derivatives trading, derivatives market-making, or other speculative activities. More detailed information regarding these financial instruments, as well as the strategies and policies for their use, is contained in notes 1, 10 and 20 to the consolidated financial statements. The Corporation manages its exposure to changes in interest rates, in part, by funding its assets with an appropriate mix of fixed and variable rate debt and its exposure to currency fluctuations principally by funding local currency denominated assets with debt denominated in those same currencies. It uses interest rate swaps, currency swaps (including non-U.S. currency and cross currency interest rate swaps) and currency forwards to achieve lower borrowing costs. Substantially all of these derivatives have been designated as modifying interest rates and/or currencies associated with specific debt instruments. One example of the risks to which the Corporation is exposed is prepayment risk in certain of its business activities, such as in its mortgage servicing activities. The Corporation uses interest rate swaps, purchased options and futures as an economic hedge of the fair value of mortgage servicing rights. These swaps, futures and option-based instruments are governed by the credit risk policies described below and are transacted in either exchange-traded or over-the-counter markets. Established practices require that derivative financial instruments relate to specific asset, liability or equity transactions or to currency exposures. Substantially all treasury actions are centrally executed by the Corporation's Treasury Department, which maintains controls on all exposures, adheres to stringent counterparty credit standards and actively monitors marketplace exposures. Counterparty credit risk is managed on an individual counterparty basis, which means that gains and losses are netted for each counterparty to determine the amount at risk. When a counterparty exceeds credit exposure limits in terms of amounts due to the Corporation, typically as a result of changes in market conditions (see table below), no additional transactions are executed until the exposure with that counterparty is reduced to an amount that is within the established limit. All swaps are executed under master swap agreements containing mutual credit downgrade provisions that provide the ability to require assignment or termination in the event either party is downgraded below A3 or A-. As part of its ongoing activities, the Corporation enters into swaps that are integrated into investments in or loans to particular customers. Such integrated swaps not involving assumption of third-party credit risk are evaluated and monitored like their associated investments or loans and are not therefore subject to the same credit criteria that would apply to a stand-alone position. Except for such positions, all other swaps, purchased options and forwards with contractual maturities longer than one year are conducted within the credit policy constraints provided in the table below. Foreign exchange forwards with contractual maturities shorter than one year must be executed with counterparties having an A-1+/ P-1 credit rating and the credit limit for these transactions is $150 million. 22 Counterparty credit criteria Credit rating ------------------------------- Standard & Moody's Poor's -------------- -------------- Term of transaction Between one and five years .......... Aa3 AA- Greater than five years ............. Aaa AAA Credit exposure limits Up to $50 million ................... Aa3 AA- Up to $75 million ................... Aaa AAA The conversion of interest rate and currency risk into credit risk results in a need to monitor counterparty credit risk actively. At December 31, 2001, the notional amount of long-term derivatives for which the counterparty was rated below Aa3/AA- was $0.9 billion. These amounts are primarily the result of (1) counterparty downgrades, (2) transactions executed prior to the adoption of the Corporation's current counterparty credit standards, and (3) transactions relating to acquired assets or businesses. Following is an analysis of credit risk exposures for the last three years. Percentage of Notional Derivative Exposure by Counterparty Credit Rating ------------------------------------------------------------------------ Moody's/Standard & Poor's 2001 2000 1999 --------------------------- ---------------- --------------- -------------- Aaa/AAA ................... 70% 64% 59% Aa/AA ..................... 29% 35% 37% A/A and below ............. 1% 1% 4% The interplay of the Corporation's credit risk policy with its funding activities is seen in the following example, in which the Corporation is assumed to have been offered three alternatives for funding five-year fixed rate U.S. dollar assets with five-year fixed rate U.S. dollar debt.
Spread over U.S. Treasuries in basis points Counterparty ------------------------------ ------------------------- (a) Fixed rate five-year medium-term note ............. +75 - (b) U.S. dollar commercial paper swapped into five-year U.S. dollar fixed rate funding .................... +60 A (c) Swiss franc fixed rate debt swapped into five-year U.S. dollar fixed rate funding .................... +73 B
Counterparty A is a major brokerage house with an Aaa/AAA rated swap subsidiary and a current exposure in terms of amounts due to the Corporation of $39 million. Counterparty B is an Aa2/AA rated insurance company with a current exposure of $50 million. In this hypothetical case, the Corporation would have chosen alternative (a) or alternative (b), depending on the ratio of commercial paper outstanding to total debt outstanding. Alternative (c) would not have been chosen as the additional credit risk of Counterparty B would have exceeded the Corporation's risk management limits. The U.S. Securities and Exchange Commission requires that registrants provide information about potential effects of changes in interest rates and currency exchange. Although the rules offer alternatives for presenting this information, none of the alternatives is without limitations. The following discussion is based on so-called "shock-tests," which model effects of interest rate and currency shifts on the reporting company. Shock tests, while probably the most meaningful analysis permitted, are constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by their inability to include the complex market reactions that normally would arise from the market shifts modeled. While the following results of shock tests for changes in interest rates and currency exchange rates may have some limited use as benchmarks, they should not be viewed as forecasts. - One means of assessing exposure to interest rate changes is a duration-based analysis that measures the potential loss in net earnings resulting from a hypothetical increase in interest rates of 100 basis points across all maturities (sometimes referred to as a "parallel shift in the yield curve"). Under this model, with all else constant, it is estimated that such an increase, including repricing effects in the securities portfolio, would reduce the 2002 net earnings of the Corporation 23 based on year-end 2001 positions by approximately $157 million. Based on positions at year-end 2000, the pro forma effect on 2001 net earnings of such an increase in interest rates was estimated to be a decrease of approximately $93 million. - The geographic distribution of the Corporation's operations is diverse. One means of assessing exposure to changes in currency exchange rates is to model effects on reported earnings using a sensitivity analysis. Year-end 2001 consolidated currency exposures, including financial instruments designated and effective as hedges, were analyzed to identify Corporation assets and liabilities denominated in other than their relevant functional currency. Net unhedged exposures in each currency were then remeasured assuming a 10% decrease (substantially greater decreases for hyperinflationary currencies) in currency exchange rates compared with the U.S. dollar. Under this model, management estimated at year-end 2001 that such a decrease would have an insignificant effect on 2002 earnings of the Corporation. Statement of Changes in Share Owners' Equity Share owners' equity increased $5,490 million to $31,563 million at year-end 2001. The increase was largely attributable to net earnings during the period of $5,902 million and capital contributions of $2,649 million, partially offset by dividends of $2,042 million. Currency translation adjustments increased equity by $36 million in 2001. Changes in the currency translation adjustment reflect the effects of changes in currency exchange rates on the Corporation's net investment in non-U.S. subsidiaries that have functional currencies other than the U.S. dollar. Accumulated currency translation adjustments affect net earnings only when all or a portion of an affiliate is disposed of. Adoption of SFAS 133 in 2001 reduced equity by $832 million, including $810 million at the date of adoption. Further information about this accounting change is provided in note 1. Statement of Cash Flows The Corporation's cash and equivalents aggregated $6.8 billion at the end of 2001, up from $5.8 billion at year-end 2000. One of the primary sources of cash for the Corporation is short and long-term borrowings. Over the past three years, the Corporation's borrowings with maturities of 90 days or less have increased by $27.8 billion. New borrowings of $123.5 billion having maturities longer than 90 days were added during those years, while $94.9 billion of such longer-term borrowings were retired. The Corporation also generated $40.6 billion from operating activities, which benefited in 2001 from an increase in insurance liabilities and reserves and a decrease from the planned run-off of policyholder contracts at Toho. The principal use of cash by the Corporation has been investing in assets to grow its businesses. Of the $106.7 billion that the Corporation invested over the past three years, $39.4 billion was used for additions to financing receivables; $37.4 billion was used to invest in new equipment, principally for lease to others; and $22.0 billion was used for acquisitions of new businesses, the largest of which were Heller Financial and Mellon Leasing in 2001 and Japan Leasing and the credit card operations of JC Penney in 1999. With the financial flexibility that comes with excellent credit ratings, management believes that the Corporation should be well positioned to meet the global needs of its customers for capital and to continue growing its diversified asset base. Liquidity The major debt-rating agencies evaluate the financial condition of GE Capital. Factors that are important to the ratings of GE Capital include the following: cash generating ability - including cash generated from operating activities; earnings quality - including revenue growth and the breadth and diversity of sources of income; leverage ratios - such as debt to total capital and interest coverage; and asset utilization, including return on assets and asset turnover ratios. Considering those factors, as well as other criteria appropriate to GE Capital, those major rating agencies continue to give the highest ratings to debt of GE Capital (long-term credit rating AAA/Aaa; short-term credit rating A-1+/P-1). Global commercial paper markets are a primary source of liquidity for the Corporation. GE Capital is the most widely-held name in those markets, with $110.9 billion and $88.1 billion outstanding at the end of 2001 and 2000, respectively. Money markets are extremely robust. In 2001, GE Capital's commercial paper accounted for only 2.4% of activity with maturities of less than one year in the U.S. market, the largest of the global money markets. Management believes that alternative sources of liquidity are sufficient to permit an orderly transition from commercial paper in the unlikely event of impaired access to those markets. Funding sources on which management would rely would depend on the nature of such a hypothetical event, but include $33 billion 24 of contractually committed lending agreements with highly-rated global banks, medium and long-term funding, monetization and asset securitization, cash receipts from the Corporation's lending and leasing activities, short-term secured funding on global assets, and asset sales. Strength of commercial paper markets and GE Capital's access to those markets was evidenced on and immediately after September 11, when many financial markets were closed, but GE Capital continued to issue commercial paper without interruption. Off-balance sheet arrangements are used in the ordinary course of business to achieve improved share owner returns. One of the most common forms of off-balance sheet arrangements is asset securitization. The transactions described below are similar to those used by many financial institutions and are part of an $800 billion annual market for asset-backed commercial paper. The Corporation uses sponsored and third-party entities as well as term execution for securitizations. As part of this program, management considers the relative risks and returns of each alternative and predominantly uses sponsored entities. Management believes these transactions could be readily executed through non-sponsored entities or term securitization at insignificant incremental cost. In addition to improved share owner returns, special purpose entities serve as funding sources for a variety of diversified lending and securities transactions, transfer selected credit risk and improve cash flows while enhancing the ability to provide a full range of competitive products for customers. The discussion below and on pages 25 and 26 describes sponsored special purpose entities, and is organized as follows: - - Structure of sponsored special purpose entities and of transactions that result in gains on sales and removal of assets from the financial statements. This section describes assets in the entities as well as management prohibitions on certain types of activities. - - Support, both financial and operational, provided for special purpose entities. This section describes the potential risks associated with special purpose entities as well as management's measures to control risk and conclusions about its potential significance. - - Accounting outlook for these entities. This section briefly discusses the accounting policy deliberations that have been undertaken recently regarding special purpose entities. Structure. Simply stated, the Corporation is selling high-quality, low-yield financial assets to highly-rated entities that have financed those purchases using low-cost commercial paper. Because the Corporation is the sponsor of these entities and guarantees certain of their positions, management believes that the structures warrant a more complete explanation, as follows. The first step in the securitization process uses entities that meet the accounting criteria for Qualifying Special Purpose Entities (qualifying entities). Among other criteria, a qualifying entity's activities must be restricted to passive investment in financial assets and issuance of beneficial interests in those assets. Under generally accepted accounting principles, entities meeting these criteria are not consolidated in the sponsor's financial statements. The Corporation sells selected financial assets to qualifying entities. Examples include the Corporation's financing and credit card receivables. On the whole, the credit quality of such assets is equal to or higher than the credit quality of similar assets owned by the Corporation. Qualifying entities raise cash by issuing beneficial interests - rights to cash flows from the assets - to other GE Capital-sponsored special purpose entities that issue highly-rated commercial paper to third-party institutional investors. These entities use commercial paper proceeds to obtain beneficial interests in the financial assets of qualifying entities, as well as financial assets originated by multiple third parties. The Corporation provides credit support for certain of these assets, as well as liquidity support for the commercial paper, as described on page 25. In accordance with its contractual commitments to the entities, the Corporation rigorously underwrites and services the associated assets, both those originated by the Corporation, and those originated by other participants. All of the entities' assets serve as collateral for the commercial paper. These entities are not consolidated in the accompanying financial statements. Support activities include credit reviews at acquisition and ongoing review, billing and collection activities - the same support activities that the Corporation employs for its own financing receivables. GE Capital-sponsored special purpose entities are routinely evaluated by the major credit rating agencies, including monthly reviews of key performance indicators and annual reviews of asset quality. Commercial paper issued by these entities has always received the highest available ratings from the major credit rating agencies and at year-end 2001 was rated A-1+/P-1. 25 The following table summarizes receivables held by special purpose entities. (In millions) 2001 2000 --------------- -------------- Receivables - secured by Equipment (a)................. $ 12,781 $ 7,993 Commercial real estate........ 8,276 6,389 Other assets (a).............. 7,761 6,249 Credit card receivables.......... 9,470 6,170 Trade receivables (a)............ 3,028 3,138 --------------- -------------- Total receivables........... $ 41,316 $ 29,939 =============== ============== (a) GE assets included in the categories above at year-end 2001 and 2000, respectively, are as follows: Equipment - $631 million and $269 million; Other assets - $757 million and $611 million; Trade receivables - $2,396 million and $1,733 million. Each of the categories of assets shown in the table above represent portfolios of assets that, in addition to being highly rated, are diversified to avoid concentrations of risk. In each of the first three categories, financing receivables are collateralized by a diverse mix of assets. Examples of assets in each category follow: equipment - loans and leases on manufacturing and transportation equipment; commercial real estate - loans on diversified commercial property; other assets - diversified commercial loans; credit card receivables - more than 23 million individual accounts; trade receivables - balances of high credit quality accounts from sales of a broad range of products and services to a diversified customer base. In addition to the activities discussed previously, Financial Guaranty Insurance Company (FGIC), a leader in the municipal bond insurance market, uses special purpose entities that offer municipalities guaranteed investment contracts with interests in high-quality, fixed-maturity, investment grade assets. FGIC actively manages these assets under strict investment criteria and GE Capital also provides certain performance guarantees. Total assets in sponsored FGIC entities amounted to $13.4 billion and $10.2 billion at December 31, 2001 and 2000, respectively. None of these special purpose entities or qualifying entities is permitted to hold GE stock and there are no commitments or guarantees that provide for the potential issuance of GE stock. These entities do not engage in speculative activities of any description, are not used to hedge GE Capital positions, and under GE integrity policies, no GE employee is permitted to invest in any sponsored special purpose entity. Support. Financial support for certain special purpose entities is provided in the following ways. - - Under active liquidity support agreements, the Corporation has agreed to lend to these entities on a secured basis if (a) certain market conditions render the entities unable to issue new debt instruments, or (b) the entity's credit ratings were reduced below specified levels. The maximum amount of such support for commercial paper outstanding was $41.5 billion at December 31, 2001. Under related unused liquidity support agreements, the Corporation has made additional liquidity support commitments of $9.4 billion at December 31, 2001, that would be effective upon addition of qualified assets to the entities. - - Under credit support agreements, the Corporation provides recourse for a maximum of $14.3 billion of credit losses in special purpose entities. $8.9 billion of this support represents full recourse for certain assets; the balance is based on loss-sharing formulas. Assets with credit support are funded by commercial paper that is subject to the liquidity support described above. Potential credit losses are provided for in the Corporation's financial statements based on management's best estimate of probable losses inherent in the portfolio using the same methodology as for owned assets. The Corporation's allowances for losses amounted to $0.6 billion and $0.5 billion at year-end 2001 and 2000, respectively. - - Performance guarantees relate to letters of credit and liquidity support for guaranteed investment contracts and are subject to a maximum of $3.8 billion at December 31, 2001. Management has extensive experience in evaluating economic, liquidity and credit risk. In view of this experience, the high quality of assets in these entities, the historically robust quality of commercial paper markets, and the historical reliability of controls applied both to asset servicing and to activities in the credit markets, management believes that, under any reasonable future economic developments, the likelihood is remote that any such arrangements could have a significant effect on the Corporation's operations, cash flows or financial position. Sales of securitized assets to special purpose entities result in a gain or loss amounting to the net of sales proceeds, the carrying amount of net assets sold, the fair value of servicing rights and an allowance for losses. Securitization sales resulted in gains of $1.3 billion and about $0.5 billion in 2001 and 2000, respectively, and are included in time sales, loan and other income. 26 Accounting outlook. Various generally accepted accounting principles specify the conditions that the Corporation observes in not consolidating special purpose entities and qualifying entities. Accounting for special purpose entities is under review by the Financial Accounting Standards Board, and their non-consolidated status may change as a result of those reviews. Summary. The special purpose entities described above meet the Corporation's economic objectives for their use while complying with generally accepted accounting principles. In the event that accounting rules change in a way that adversely affects sponsored entities, alternative securitization techniques discussed on page 24 would likely serve as a substitute at insignificant incremental cost. Principal debt conditions that could automatically result in remedies, such as acceleration of the Corporation's debt, are described below. - - If the short-term credit rating of GE Capital or certain special purpose entities previously discussed were to fall below A-1+/P-1, GE Capital would be required to provide substitute liquidity for those entities or to purchase the outstanding commercial paper. The maximum amount that GE Capital would be required to provide in the event of such a downgrade is $41.5 billion at December 31, 2001. - - If the long-term credit rating of GE Capital or certain special purpose entities previously discussed were to fall below AA-/Aa3, GE Capital would be required to provide substitute credit support or liquidate the special purpose entities. The maximum amount that GE Capital would be required to substitute in the event of such a downgrade is $14.3 billion at December 31, 2001. - - If the long-term credit rating of the Corporation under certain swap, forward and option contracts falls below A-/A3, certain remedies are required as discussed in note 20. - - If GE Capital's ratio of earnings to fixed charges, which was 1.72 to 1 at the end of 2001 deteriorates to 1.10 to 1 or, upon redemption of certain preferred stock, its ratio of debt to equity, which was 7.31 to 1 at the end of 2001 exceeds 8 to 1, GE has committed to contribute capital to GE Capital. None of these conditions has been met in the Corporation's history, and management believes that under any reasonable future economic developments, the likelihood is remote that any such arrangements could have a significant effect on the Corporation's operations, cash flows or financial position. Timing of contractual commitments at the Corporation, related to leases and debt, follow.
(In billions) 2002 2003 2004 2005 2006 ------------- -------------- -------------- ------------- ------------- Commercial paper........ $ 110.9 $ - $ - $ - $ - Other................... 44.2 25.7 15.2 10.5 6.9
Critical Accounting Policies High-quality financial statements require rigorous application of high-quality accounting policies. The policies discussed below are considered by management to be critical to an understanding of the Corporation's financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Losses on financing receivables are recognized when they are incurred. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral value, and the present and expected levels of interest rates. The Corporation's exposure to losses on financing receivables at year-end 2001 was approximately $190 billion, including credit support for special purpose entities, against which an allowance for losses of approximately $5.3 billion was provided. An analysis of changes in the allowance for losses is provided on page 19 which discusses financing receivable portfolio quality. While losses depend to a large degree on future economic conditions, management does not forecast significant adverse credit development in 2002. Further information is provided in notes 1, 3 and 4. Impairment of investment securities results in a charge to operations when a market decline below cost is other than temporary. Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market value, the duration of that market decline and the financial health of and specific prospects for the issuer. The Corporation's investment securities amounted to approximately $79 billion at year-end 2001. Gross unrealized gains and losses included in that carrying 27 amount related to debt securities were $1.6 billion and $2.0 billion, respectively. Gross unrealized gains and losses on equity securities were $0.2 billion and $0.3 billion, respectively. Of those securities whose carrying amount exceeds fair value at year-end 2001, and based on application of the Corporation's accounting policy for impairment, approximately $600 million of portfolio value is at risk of being charged to earnings in 2002. The Corporation actively performs comprehensive market research, monitors market conditions and segments its investments by credit risk in order to minimize impairment risks. Further information is provided in notes 1 and 2 and on page 20, which discusses the investment securities portfolio. Insurance liabilities and reserves differ for short and long-duration insurance contracts. Short-duration contracts such as property and casualty policies are accounted for based on actuarial estimates of the amount of loss inherent in that period's claims, including losses for which claims have not yet been reported. Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. Measurement of long-duration insurance liabilities (such as term and whole life insurance policies) also is based on approved actuarial techniques, but necessarily includes assumptions about mortality, lapse rates and future yield on related investments. The Corporation's insurance liabilities, reserves and annuity benefits totaled $82.2 billion at year-end 2001. Of that total, approximately $4.3 billion related to unpaid claims and claims adjustment expenses for short-duration insurance coverage. Management continually evaluates the potential for changes in loss estimates, both positive and negative, and uses the results of these evaluations both to adjust recorded provisions and to adjust underwriting criteria and product offerings. Further information about insurance liabilities is provided in note 11. Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators. Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies related to financial instruments and consolidation policy require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standard setters appear likely to cause a material change in the Corporation's accounting policies, outcomes cannot be predicted with confidence. Also see note 1, Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by management when there are acceptable alternatives. New Accounting Standards Major provisions of new accounting standards that may be significant to the Corporation's financial statements in the future are described in the following paragraphs. SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets, modify the accounting for business combinations, goodwill and identifiable intangible assets. As of January 1, 2002, all goodwill and indefinite-lived intangible assets must be tested for impairment and a transition adjustment will be recognized. Management has not yet determined the exact amount of goodwill impairment under these new standards, but believes the non-cash transition charge to earnings will be approximately $1.0 billion and recognized in the first quarter of 2002. Amortization of goodwill will cease as of January 1, 2002, and, thereafter, all goodwill and any indefinite-lived intangible assets must be tested at least annually for impairment. The effect of the non-amortization provisions on 2002 operations will be affected by 2002 acquisitions and cannot be forecast, but if these rules had applied to goodwill in 2001, management believes that full-year 2001 net earnings would have increased by approximately $525 million. SFAS 143, Accounting for Asset Retirement Obligations, requires recognition of the fair value of obligations associated with the retirement of long-lived assets when there is a legal obligation to incur such costs. This amount is accounted for like an additional element of the corresponding asset's cost, and is depreciated over that asset's useful life. SFAS 143 will be effective for the Corporation on January 1, 2003. Management has not yet determined the effect of adopting this standard on the Corporation's financial position and results of operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Information about potential effects of changes in interest rates and currency exchange on the Corporation is discussed in the Interest Rate and Currency Risk Management section of Item 7. 28 Item 8. Financial Statements and Supplementary Data. INDEPENDENT AUDITORS' REPORT To the Board of Directors General Electric Capital Corporation: We have audited the consolidated financial statements of General Electric Capital Corporation and consolidated affiliates as listed in Item 14. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in Item 14. These consolidated financial statements and the financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Electric Capital Corporation and consolidated affiliates at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in note 1 to the consolidated financial statements, the Corporation in 2001 changed its method of accounting for derivative instruments and hedging activities and impairment of certain beneficial interests in securitized assets. /s/ KPMG LLP Stamford, Connecticut February 8, 2002 29
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES Statement of Earnings For the years ended December 31 (In millions) 2001 2000 1999 -------------- -------------- ------------ REVENUES Time sales, loan and other income .................................. $ 21,306 $ 21,519 $ 17,893 Operating lease rentals ............................................ 6,079 6,179 6,020 Financing leases.................................................... 4,237 3,692 3,587 Investment income .................................................. 4,949 5,458 4,390 Premium and commission income of insurance affiliates (note 11)..... 8,347 8,011 5,975 Sales of goods ..................................................... 3,627 9,408 8,740 -------------- -------------- ------------ Total revenues ................................................... 48,545 54,267 46,605 -------------- -------------- ------------ EXPENSES Interest ........................................................... 10,025 10,461 8,936 Operating and administrative (note 14) ............................. 13,465 16,379 13,500 Insurance losses and policyholder and annuity benefits.............. 8,171 7,697 5,564 Cost of goods sold ................................................. 3,266 8,537 7,976 Provision for losses on financing receivables (note 4) ............. 2,312 1,975 1,655 Depreciation and amortization of buildings and equipment and equipment on operating leases (notes 6 & 7) ...................... 3,428 3,288 3,145 Minority interest in net earnings of consolidated affiliates ....... 84 86 68 -------------- -------------- ------------ Total expenses ................................................... 40,751 48,423 40,844 -------------- -------------- ------------ Earnings before income taxes and accounting changes................. 7,794 5,844 5,761 Provision for income taxes (note 15) ............................... (1,734) (1,555) (1,553) -------------- -------------- ------------ Earnings before accounting changes.................................. 6,060 4,289 4,208 Cumulative effect of accounting changes (note 1).................... (158) - - -------------- -------------- ------------ NET EARNINGS........................................................ $ 5,902 $ 4,289 $ 4,208 ============== ============== ============
Statement of Changes in Share Owners' Equity (In millions) 2001 2000 1999 -------------- -------------- -------------- CHANGES IN SHARE OWNERS' EQUITY Balance at January 1 ............................................... $ 26,073 $ 22,746 $ 21,069 -------------- -------------- -------------- Transactions with share owners (note 13) ........................... 607 (642) (1,086) -------------- -------------- -------------- Changes other than transactions with share owners: Increases attributable to net earnings ........................... 5,902 4,289 4,208 Investment securities - net (note 13)............................. (223) 24 (1,330) Currency translation adjustments (note 13) ....................... 36 (344) (115) Derivatives qualifying as hedges (note 13)........................ (832) - - -------------- -------------- -------------- Total changes other than transactions with share owners ......... 4,883 3,969 2,763 -------------- -------------- -------------- Balance at December 31 ............................................. $ 31,563 $ 26,073 $ 22,746 ============== ============== ==============
See notes to Consolidated Financial Statements. 30
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES Statement of Financial Position At December 31 (In millions) 2001 2000 -------------- --------------- ASSETS Cash and equivalents ............................................................. $ 6,784 $ 5,819 Investment securities (note 2) ................................................... 78,723 70,282 Financing receivables (note 3): Time sales and loans, net of deferred income .................................. 120,708 93,540 Investment in financing leases, net of deferred income ........................ 55,336 50,930 -------------- --------------- 176,044 144,470 Allowance for losses on financing receivables (note 4) ........................ (4,743) (3,970) -------------- --------------- Financing receivables - net ................................................. 171,301 140,500 Insurance receivables (note 5).................................................... 10,642 12,060 Other receivables ................................................................ 15,132 14,308 Inventories ...................................................................... 270 666 Equipment on operating leases (at cost), less accumulated amortization of $9,133 and $7,900 (note 6) ............................................................ 27,314 24,145 Buildings and equipment (at cost), less accumulated depreciation of $1,521 and $1,999 (note 7) ................................................................ 1,898 3,511 Intangible assets - net (note 8) ................................................. 16,986 13,216 Other assets (note 9) ............................................................ 52,026 48,129 -------------- --------------- Total assets .................................................................. $ 381,076 $ 332,636 ============== =============== LIABILITIES AND SHARE OWNERS' EQUITY Short-term borrowings (note 10) .................................................. $ 154,124 $ 117,482 Long-term borrowings (note 10) ................................................... 76,474 78,776 -------------- --------------- Total borrowings .............................................................. 230,598 196,258 Accounts payable ................................................................. 12,479 9,484 Insurance liabilities, reserves and annuity benefits (note 11) ................... 82,224 79,933 Other liabilities ................................................................ 14,451 11,280 Deferred income taxes (note 15) .................................................. 8,111 8,264 -------------- --------------- Total liabilities ............................................................. 347,863 305,219 -------------- --------------- Minority interest in equity of consolidated affiliates (note 12) ................. 1,650 1,344 -------------- --------------- Variable cumulative preferred stock, $100 par value, liquidation preference $100,000 per share (33,000 shares authorized at December 31, 2001 and 2000 and 26,000 shares outstanding at December 31, 2001 and 2000) ....................... 3 3 Common stock, $0.01 par value (3,866,000 shares authorized and 3,837,825 shares outstanding at December 31, 2001 and 2000, respectively) ....................... 1 1 Additional paid-in capital ....................................................... 9,763 7,114 Retained earnings ................................................................ 23,554 19,694 Accumulated gains / (losses) - net: Investment securities (a) .................................................... (362) (139) Currency translation adjustments (a) .......................................... (564) (600) Derivatives qualifying as hedges (a)........................................... (832) - -------------- --------------- Total share owners' equity (note 13) .......................................... 31,563 26,073 -------------- --------------- Total liabilities and share owners' equity .................................... $ 381,076 $ 332,636 ============== ===============
(a) The sum of accumulated gains/(losses) on investment securities, currency translation adjustments and derivatives qualifying as hedges constitutes "Accumulated nonowner changes other than earnings," as shown in note 13, and was ($1,758) million and ($739) million at year-end 2001 and 2000, respectively. See notes to Consolidated Financial Statements. 31
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES Statement of Cash Flows For the years ended December 31 (In millions) 2001 2000 1999 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings .................................................... $ 5,902 $ 4,289 $ 4,208 Adjustments to reconcile net earnings to cash provided from operating activities: Cumulative effect of accounting changes...................... 158 - - Depreciation and amortization of buildings and equipment and equipment on operating leases ............................. 3,428 3,288 3,145 Provision for losses on financing receivables ............... 2,312 1,975 1,655 Amortization of goodwill and other intangibles .............. 1,036 2,020 1,083 Increase in deferred income taxes ........................... 705 514 854 Decrease (increase) in inventories .......................... 396 (261) 327 Increase (decrease) in accounts payable ..................... 3,914 3,089 (215) Increase (decrease) in insurance liabilities and reserves ... 3,499 (2,890) 2,085 All other operating activities .............................. (4,705) (1,969) 757 --------------- --------------- --------------- Cash from operating activities ................................. 16,645 10,055 13,899 --------------- --------------- --------------- CASH FLOWS USED FOR INVESTING ACTIVITIES Net increase in financing receivables (note 19) ................. (13,090) (15,397) (10,889) Buildings and equipment and equipment on operating leases - additions .................................................. (12,569) (11,384) (13,432) - dispositions ............................................... 7,258 6,680 6,252 Payments for principal businesses purchased, net of cash acquired................................................. (10,993) (1,176) (9,823) All other investing activities (note 19) ........................ (6,315) (13,649) (8,182) --------------- --------------- --------------- Cash used for investing activities ............................. (35,709) (34,926) (36,074) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in borrowings (maturities of 90 days or less) ........ 23,424 (2,445) 6,865 Newly issued debt (maturities longer than 90 days) (note 19) .... 30,738 46,188 46,556 Repayments and other reductions (maturities longer than 90 days) (note 19) .......................................... (36,051) (31,907) (26,924) Dividends paid .................................................. (2,042) (1,612) (1,537) All other financing activities (note 19) ........................ 3,960 13,961 640 --------------- --------------- --------------- Cash from financing activities ................................. 20,029 24,185 25,600 --------------- --------------- --------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING THE YEAR ..... 965 (686) 3,425 CASH AND EQUIVALENTS AT BEGINNING OF YEAR ....................... 5,819 6,505 3,080 --------------- --------------- --------------- CASH AND EQUIVALENTS AT END OF YEAR ............................. $ 6,784 $ 5,819 $ 6,505 =============== =============== ===============
See notes to Consolidated Financial Statements. 32 GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES Notes to Consolidated Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation - The consolidated financial statements represent the adding together of General Electric Capital Corporation ("the Parent" or "GE Capital") and all of its majority-owned and controlled affiliates ("consolidated affiliates"), (collectively called "the Corporation"). All outstanding common stock of the Parent is owned by General Electric Capital Services, Inc. ("GE Capital Services"), all of whose common stock is owned, directly or indirectly, by General Electric Company ("GE Company" or "GE"). On July 2, 2001, the parent changed its state of incorporation to Delaware. In connection with the reincorporation, the par value of the common stock decreased from $200 per share to $0.01 per share. The consolidated financial statements contained herein have been restated to give retroactive effect to the reincorporation. All significant transactions among the Parent and consolidated affiliates have been eliminated. Associated companies, generally companies that are 20% to 50% owned and over which the Corporation, directly or indirectly, has significant influence, are included in other assets and valued at the appropriate share of equity plus loans and advances. Certain prior-year amounts have been reclassified to conform to the current year presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Methods of Recording Revenues from Services (Earned Income) - Income on all loans is recognized on the interest method. Accrual of interest income is suspended at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days delinquent. Interest income on impaired loans is recognized either as cash is collected or on a cost recovery basis as conditions warrant. Financing lease income is recorded on the interest method so as to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values of leased assets are based primarily on periodic independent appraisals of the values of leased assets remaining at expiration of the lease terms. Operating lease income is recognized on a straight-line basis over the terms of the underlying leases. Origination, commitment and other nonrefundable fees related to fundings are deferred and recorded in earned income on the interest method. Commitment fees related to loans not expected to be funded and line-of-credit fees are deferred and recorded in earned income on a straight-line basis over the period to which the fees relate. Syndication fees are recorded in earned income at the time related services are performed unless significant contingencies exist. Income from investment and insurance activities is discussed on page 33. Sales of Goods - Sales of goods are recorded when a firm sales agreement is in place, delivery has occurred and collectibility of the fixed or determinable sales price is reasonably assured. Cash and Equivalents - Certificates and other time deposits are treated as cash equivalents. Recognition of Losses on Financing Receivables and Investments - The allowance for losses on small-balance receivables reflects management's best estimate of probable losses inherent in the portfolio determined principally on the basis of historical experience. For other receivables, principally the larger loans and leases, the allowance for losses is determined primarily on the basis of management's best estimate of probable losses, including specific allowances for known troubled accounts. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for losses. Small-balance accounts generally are written off when 6 to 12 months delinquent, although any such balance judged to be uncollectible, such as an account in bankruptcy, is written down immediately to estimated realizable value. Large-balance accounts are reviewed at least quarterly, and those accounts with amounts that are judged to be uncollectible are written down to estimated realizable value. When collateral is repossessed in satisfaction of a loan, the receivable is written down against the allowance for losses to estimated fair value of the asset less costs to sell, transferred to other assets and subsequently carried at the lower of cost or estimated fair value less costs to sell. This accounting method has been employed principally for specialized financing transactions. 33 Investment Securities - Investments in debt and marketable equity securities are reported at fair value based primarily on quoted market prices or, if quoted prices are not available, discounted expected cash flows using market rates commensurate with credit quality and maturity of the investment. Substantially all investment securities are designated as available for sale, with unrealized gains and losses included in share owners' equity, net of applicable taxes and other adjustments. Investment securities are regularly reviewed for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, and the financial health of and specific prospects for the issuer. Unrealized losses that are other than temporary are recognized in earnings. Realized gains and losses are accounted for on the specific identification method. Inventories - The Corporation's inventories consist primarily of finished products held for sale. All inventories are stated at the lower of cost or realizable values. Cost is primarily determined on a first-in, first-out basis. Equipment on Operating Leases - Equipment is amortized, principally on a straight-line basis, to estimated residual value over the lease term or over the estimated economic life of the equipment. Buildings and Equipment - Depreciation is recorded on either a sum-of-the-years digits formula or a straight-line basis over the lives of the assets. Intangible Assets - Goodwill is amortized over its estimated period of benefit on a straight-line basis; other intangible assets are amortized on appropriate bases over their estimated lives. No amortization period exceeds 40 years. When an intangible asset exceeds associated expected operating cash flows, it is considered to be impaired and is written down to fair value, which is determined based on either discounted future cash flows or appraised values. Insurance Accounting Policies - Accounting policies for insurance businesses are as follows. Premium income. Insurance premiums are reported as earned income as follows: - - For short-duration insurance contracts (including property and casualty, accident and health, and financial guaranty insurance), premiums are reported as earned income, generally on a pro rata basis, over the terms of the related agreements. For retrospectively rated reinsurance contracts, premium adjustments are recorded based on estimated losses and loss expenses, taking into consideration both case and incurred-but-not-reported reserves. - - For traditional long-duration insurance contracts (including term and whole life contracts and annuities payable for the life of the annuitant), premiums are reported as earned income when due. - - For investment contracts and universal life contracts, premiums received are reported as liabilities, not as revenues. Universal life contracts are long-duration insurance contracts with terms that are not fixed and guaranteed; for these contracts, revenues are recognized for assessments against the policyholder's account, mostly for mortality, contract initiation, administration and surrender. Investment contracts are contracts that have neither significant mortality nor significant morbidity risk, including annuities payable for a determined period; for these contracts, revenues are recognized on the associated investments and amounts credited to policyholder accounts are charged to expense. Deferred policy acquisition costs. Costs that vary with and are primarily related to the acquisition of new and renewal insurance and investment contracts are deferred and amortized over the respective policy terms. For short-duration insurance contracts, acquisition costs consist primarily of commissions, brokerage expenses and premium taxes. For long-duration insurance contracts, these costs consist primarily of first-year commissions in excess of recurring renewal commissions, certain variable sales expenses and certain support costs such as underwriting and policy issue expenses. - - For short-duration insurance contracts, these costs are amortized pro rata over the contract periods in which the related premiums are earned. - - For traditional long-duration insurance contracts, these costs are amortized over the respective contract periods in proportion to either anticipated premium income or, in the case of limited-payment contracts, estimated benefit payments. - - For investment contracts and universal life contracts, these costs are amortized on the basis of anticipated gross profits. Periodically, deferred policy acquisition costs are reviewed for recoverability; anticipated investment income is considered in recoverability evaluations. 34 Present value of future profits. The actuarially determined present value of anticipated net cash flows to be realized from insurance, annuity and investment contracts in force at the date of acquisition of life insurance enterprises is recorded as the present value of future profits and is amortized over the respective policy terms in a manner similar to deferred policy acquisition costs. Unamortized balances are adjusted to reflect experience and impairment, if any. Accounting Changes At January 1, 2001, the Corporation adopted Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Under SFAS 133, all derivative instruments (including certain derivative instruments embedded in other contracts) are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily in equity, then recognized in earnings along with the related effects of the hedged items. Any ineffective portion of hedges is reported in earnings as it occurs. Further information about derivatives and hedging is provided in note 20. The cumulative effect of adopting this accounting change at January 1, 2001, was as follows: Share Owners' (In millions) Earnings Equity ------------- -------------- Adjustment to fair value of derivatives (a).... $ (60) $ (1,315) Income tax effects............................. 22 505 ------------- -------------- Total..................................... $ (38) $ (810) ============= ============== (a) For earnings effect, amount shown is net of adjustment to hedged items. The cumulative effect on earnings comprised two significant elements. One element was associated with conversion option positions that were embedded in financing agreements, and the other was a portion of the effect of marking to market options and currency contracts used for hedging. The cumulative effect on share owners' equity was primarily attributable to marking to market forward and swap contracts used to hedge variable-rate borrowings. Decreases in the fair values of these instruments were attributable to declines in interest rates since inception of the hedging arrangements. As a matter of policy, the Corporation ensures that funding, including the effect of derivatives, of its lending and other financing asset positions are substantially matched in character (e.g., fixed vs. floating) and duration. As a result, declines in the fair values of these effective derivatives are offset by unrecognized gains on the related financing assets and hedged items, and future earnings will not be subject to volatility arising from interest rate changes. In November 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus on accounting for impairment of retained beneficial interests (EITF 99-20). Under this consensus, impairment of certain beneficial interests in securitized assets must be recognized when (1) the asset's fair value is below its carrying value, and (2) it is probable that there has been an adverse change in estimated cash flows. The cumulative effect of adopting EITF 99-20 at January 1, 2001, was a one-time reduction of net earnings of $120 million. These accounting changes did not involve cash, and management expects that they will have no more than a modest effect on future results. 35 NOTE 2. INVESTMENT SECURITIES A summary of investment securities follows:
Gross Gross Amortized unrealized unrealized Estimated (In millions) cost gains losses fair value --------------- --------------- --------------- --------------- December 31, 2001 Debt securities: U.S. corporate ............................... $ 41,880 $ 824 $ (1,537) $ 41,167 State and municipal .......................... 6,445 107 (60) 6,492 Mortgage-backed .............................. 12,281 357 (55) 12,583 Corporate - non-U.S. ......................... 10,351 174 (235) 10,290 Government - non-U.S. ........................ 2,537 118 (98) 2,557 U.S. government and federal agency ........... 961 21 (31) 951 Equity securities ............................. 4,868 158 (343) 4,683 --------------- --------------- --------------- --------------- $ 79,323 $ 1,759 $ (2,359) $ 78,723 =============== =============== =============== =============== December 31, 2000 Debt securities: U.S. corporate ............................... $ 34,759 $ 420 $ (1,186) $ 33,993 State and municipal .......................... 6,459 243 (125) 6,577 Mortgage-backed .............................. 10,367 278 (141) 10,504 Corporate - non-U.S. ......................... 9,043 323 (104) 9,262 Government - non-U.S. ........................ 2,874 60 (79) 2,855 U.S. government and federal agency ........... 1,623 10 (38) 1,595 Equity securities ............................. 5,301 634 (439) 5,496 --------------- --------------- --------------- --------------- $ 70,426 $ 1,968 $ (2,112) $ 70,282 =============== =============== =============== ===============
A substantial portion of mortgage-backed securities shown in the table above are collateralized by U.S. residential mortgages. At December 31, 2001, contractual maturities of debt securities, excluding mortgage-backed securities, were as follows: Estimated fair (In millions) Amortized cost value ---------------- ------------------- Due in: 2002 ............................... $ 2,600 $ 2,654 2003-2006 .......................... 13,854 13,721 2007-2011 .......................... 14,969 14,730 2012 and later ..................... 30,751 30,352 It is expected that actual maturities will differ from contractual maturities because borrowers have the right to call or prepay certain obligations. Supplemental information about gross realized gains and losses on investment securities follows. (In millions) 2001 2000 1999 ---------------- ------------------- ------------------ Gains (a)...... $ 1,234 $ 1,494 $ 553 Losses......... (713) (337) (327) ---------------- ------------------- ------------------ Net....... $ 521 $ 1,157 $ 226 ================ =================== ================== (a) Includes $219 million, in 2000, from the sale of the Corporation's investment in common stock of Paine Webber Group, Inc. Proceeds from sales of investment securities in 2001 were $24,171 million ($12,384 million in 2000 and $9,354 million in 1999). 36 NOTE 3. FINANCING RECEIVABLES Financing receivables at December 31, 2001 and 2000, are shown below. (In millions) 2001 2000 ----------- ----------- Time sales and loans: Consumer Services ................................. $ 44,321 $ 41,984 Equipment Management .............................. 2,391 1,385 Mid-Market Financing .............................. 57,115 34,740 Specialized Financing ............................. 16,840 14,503 Other ............................................ 41 928 ----------- ----------- Time sales and loans - net of deferred income .... 120,708 93,540 ----------- ----------- Investment in financing leases: Direct financing leases ........................... 48,601 46,053 Leveraged leases .................................. 6,735 4,877 ----------- ----------- Investment in financing leases - net of deferred income............................ 55,336 50,930 ----------- ----------- 176,044 144,470 Less allowance for losses (note 4) .................. (4,743) (3,970) ----------- ----------- Net investment................................... $ 171,301 $ 140,500 =========== =========== Time sales and loans represents transactions in a variety of forms, including time sales, revolving charge and credit, mortgages, installment loans, intermediate-term loans and revolving loans secured by business assets. The portfolio includes time sales and loans carried at the principal amount on which finance charges are billed periodically, and time sales and loans carried at gross book value, which includes finance charges. At year-end 2001 and 2000, commercial real estate loans and leases of $25,393 million and $21,265 million, respectively, were included in either financing receivables or insurance receivables. Note 6 contains information on commercial airline loans and leases. Investment in financing leases consists of direct financing and leveraged leases of aircraft, railroad rolling stock, autos, other transportation equipment, data processing equipment and medical equipment, as well as other manufacturing, power generation, commercial real estate, and commercial equipment and facilities. As the sole owner of assets under direct financing leases and as the equity participant in leveraged leases, the Corporation is taxed on total lease payments received and is entitled to tax deductions based on the cost of leased assets and tax deductions for interest paid to third-party participants. The Corporation is generally entitled to any residual value of leased assets. Investment in direct financing and leveraged leases represents net unpaid rentals and estimated unguaranteed residual values of leased equipment, less related deferred income. The Corporation has no general obligation for principal and interest on notes and other instruments representing third-party participation related to leveraged leases; such notes and other instruments have not been included in liabilities but have been offset against the related rentals receivable. The Corporation's share of rentals receivable on leveraged leases is subordinate to the share of other participants who also have security interests in the leased equipment. 37 The Corporation's net investment in financing leases at December 31, 2001 and 2000, is shown below.
Total financing leases Direct financing leases Leveraged leases -------------------------- ------------------------- -------------------------- (In millions) 2001 2000 2001 2000 2001 2000 ------------- ------------ ------------ ------------ ------------ ------------- Total minimum lease payments receivable ..................... $ 82,631 $ 74,909 $ 53,185 $ 50,505 $ 29,446 $ 24,404 Less principal and interest on third-party nonrecourse debt .... (22,588) (19,773) - - (22,588) (19,773) ------------- ------------ ------------ ------------ ------------ ------------- Net rentals receivable .......... 60,043 55,136 53,185 50,505 6,858 4,631 Estimated unguaranteed residual value of leased assets .......... 8,396 7,202 4,944 4,490 3,452 2,712 Less deferred income .............. (13,103) (11,408) (9,528) (8,942) (3,575) (2,466) ------------- ------------ ------------ ------------ ------------ ------------- Investment in financing leases .. 55,336 50,930 48,601 46,053 6,735 4,877 Less: Allowance for losses ....... (679) (646) (606) (558) (73) (88) Deferred taxes arising from financing leases .......... (9,128) (8,423) (4,603) (4,511) (4,525) (3,912) ------------- ------------ ------------ ------------ ------------ ------------- Net investment in financing leases $ 45,529 $ 41,861 $ 43,392 $ 40,984 $ 2,137 $ 877 ============= ============ ============ ============ ============ =============
Contractual Maturities At December 31, 2001 the Corporation's contractual maturities for time sales and loans and net rentals receivable were: (In millions) Total time sales and Net rentals Due in: loans (a) receivable (a) --------------- ------------------ 2002 ...................... $ 38,128 $ 15,232 2003....................... 22,017 13,025 2004 ...................... 19,439 8,973 2005 ...................... 10,247 6,198 2006 ...................... 7,729 3,455 2007 and later ............ 23,148 13,160 --------------- ------------------ $ 120,708 $ 60,043 =============== ================== (a) Experience has shown that a substantial portion of receivables will be paid prior to contractual maturity, and these amounts should not be regarded as forecasts of future cash flows. Nonearning consumer receivables were $1,540 million and $1,043 million at December 31, 2001 and 2000, respectively, a substantial amount of which were private-label credit card loans. Nonearning and reduced-earning receivables other than consumer receivables were $1,712 million and $949 million at year-end 2001 and 2000, respectively. "Impaired" loans are defined by generally accepted accounting principles as large balance loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. An analysis of impaired loans at December 31, 2001 and 2000, is shown below. (In millions) 2001 2000 --------------- -------------- Loans requiring allowance for losses ....... $ 1,037 $ 471 Loans expected to be fully recoverable ..... 560 371 --------------- -------------- $ 1,597 (a) $ 842 =============== ============== Allowance for losses ....................... $ 419 $ 163 Average investment during year ............. 1,103 798 Interest income earned while impaired (b) .. 17 17 (a) Includes $408 million of loans classified as impaired by Heller Financial which was acquired in October 2001. (b) Recognized principally on cash basis. 38 NOTE 4. ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES
(In millions) 2001 2000 1999 -------------- -------------- -------------- Balance at January 1 ............................................ $ 3,970 $ 3,637 $ 3,207 Provisions charged to operations ................................ 2,312 1,975 1,655 Net transfers primarily related to acquisitions and sales ....... 585 22 218 Amounts written off - net ....................................... (2,124) (1,664) (1,443) -------------- -------------- -------------- Balance at December 31 .......................................... $ 4,743 $ 3,970 $ 3,637 ============== ============== ==============
NOTE 5. INSURANCE RECEIVABLES At year-end 2001 and 2000, insurance receivables included reinsurance recoverables of $2,287 million and $1,816 million and receivables at insurance affiliates of $8,355 million and $10,244 million, respectively. Receivables at insurance affiliates include investments in whole real estate, premium receivables and other loans, policy loans and funds on deposit with reinsurers. NOTE 6. EQUIPMENT ON OPERATING LEASES Equipment on operating leases by type of equipment and accumulated amortization at December 31, 2001 and 2000, are shown below. (In millions) 2001 2000 --------------- --------------- Original cost Aircraft....................................$ 16,173 $ 12,888 Vehicles ................................... 10,779 9,872 Railroad rolling stock ..................... 3,439 3,459 Marine shipping containers ................. 1,618 2,196 Mobile and modular structures............... 1,325 1,288 Information technology equipment............ 1,321 1,069 Construction and manufacturing equipment.... 799 591 Scientific, medical and other equipment .... 993 682 --------------- --------------- 36,447 32,045 Accumulated amortization ..................... (9,133) (7,900) --------------- --------------- $ 27,314 $ 24,145 =============== =============== Amortization of equipment on operating leases was $2,955 million, $2,618 million and $2,673 million in 2001, 2000 and 1999, respectively. Noncancelable future rentals due from customers for equipment on operating leases at year-end 2001 totaled $16,072 million and are due as follows: $3,954 million in 2002; $3,183 million in 2003; $2,396 million in 2004; $1,749 million in 2005; $1,245 million in 2006 and $3,545 million thereafter. The Corporation acts as a lender and lessor to the commercial airline industry. At December 31, 2001 and 2000, the balance of such loans and leases was $21.5 billion and $15.3 billion, respectively. In addition, at December 31, 2001, the Corporation had issued financial guarantees and funding commitments of $0.9 billion ($0.6 billion at year-end 2000), credit and liquidity support agreements to special purpose entities sponsored by the Corporation of $0.9 billion ($0.6 billion at year-end 2000) and had placed multi-year orders for various Boeing, Airbus and other aircraft with list prices of approximately $19.9 billion ($22.9 billion at year-end 2000). NOTE 7. BUILDINGS AND EQUIPMENT Buildings and equipment include office buildings, satellite communications equipment, computer hardware, vehicles, furniture and office equipment. Depreciation expense was $473 million in 2001, $670 million in 2000 and $472 million in 1999. 39 NOTE 8. INTANGIBLE ASSETS Intangible assets at December 31, 2001 and 2000, are shown in the table below. (In millions) 2001 2000 -------------- -------------- Goodwill ...................................... $ 14,474 $ 10,063 Present value of future profits ("PVFP") ...... 2,033 2,579 Other intangibles ............................. 479 574 -------------- -------------- $ 16,986 $ 13,216 ============== ============== The Corporation's intangible assets are shown net of accumulated amortization of $6,244 million at December 31, 2001, and $5,225 million at December 31, 2000. The amount of goodwill amortization included in net earnings (net of income taxes) in 2001, 2000 and 1999, was $474 million, $536 million and $450 million, respectively. PVFP amortization, which is on an accelerated basis and net of interest, is projected to range from 13.3% to 6.2% of the year-end 2001 unamortized balance for each of the next five years. NOTE 9. OTHER ASSETS Other assets at December 31, 2001 and 2000, are shown in the table below. (In millions) 2001 2000 -------------- --------------- Investments: Associated companies (a) ................. $ 14,386 $ 12,784 Real estate............................... 8,083 6,496 Assets acquired for resale ............... 1,725 1,394 Other .................................... 5,007 4,959 -------------- --------------- 29,201 25,633 Separate accounts .......................... 9,988 11,628 Deferred insurance acquisition costs ....... 5,149 4,315 Derivative instruments (b).................. 1,672 308 Servicing assets (c)........................ 1,139 1,378 Other ...................................... 4,877 4,867 -------------- --------------- $ 52,026 $ 48,129 ============== =============== (a) Includes advances to associated companies which are non-controlled, non-consolidated equity investments. (b) Amounts at December 31, 2001, are stated at fair value in accordance with SFAS 133; corresponding amounts at December 31, 2000, are stated at amortized cost. See note 20 for a discussion of the types and uses of derivative instruments. (c) Associated primarily with serviced residential mortgage loans amounting to $59 billion and $81 billion at December 31, 2001 and 2000, respectively. Separate accounts represent investments controlled by policyholders and are associated with identical amounts reported as insurance liabilities in note 11. NOTE 10. BORROWINGS Total short-term borrowings at December 31, 2001 and 2000, consisted of the following:
2001 2000 --------------------------------- --------------------------------- Average Average (In millions) Amount rate (a) Amount rate (a) ---------------- ---------------- ---------------- ---------------- Commercial paper - U.S. ........................ $ 93,599 2.20% $ 71,085 6.67% Commercial paper - non-U.S. .................... 17,289 3.36 16,965 5.46 Current portion of long-term debt .............. 30,952 5.08 19,283 5.95 Other .......................................... 12,441 10,149 ---------------- ---------------- $ 154,281 $ 117,482 Foreign currency loss (b)....................... (157) - ---------------- ---------------- $ 154,124 $ 117,482 ================ ================
40 Total long-term borrowings at December 31, 2001 and 2000, were as follows:
2001 2000 ----------------------------------- ------------------ (In millions) Maturities Amount Average Rate (a) Amount -------------- ------------- -------------------- ------------------ Senior notes ....................... 2003-2055 $ 76,028 4.85% $ 78,078 Subordinated notes (c) ............. 2006-2012 873 7.83 698 ------------- ------------------ 76,901 78,776 Foreign currency loss (b)........... (427) - ------------- ------------------ $ 76,474 $ 78,776 ============= ==================
(a) Based on year-end balances and year-end local currency interest rates, including the effects of related interest rate and currency swaps, if any, directly associated with the original debt issuance. (b) Borrowings in 2001 exclude the foreign exchange effects of related currency swaps in accordance with the provisions of SFAS 133. (c) At year-end 2001 and 2000, $698 million of subordinated notes were guaranteed by GE. Borrowings of the Corporation are addressed as follows from two perspectives - liquidity and interest rate risk management. Additional information about borrowings and associated swaps can be found in note 20. Liquidity requirements of the Corporation are principally met through the credit markets. Maturities of long-term borrowings during the next five years, including the current portion of long-term debt, at December 31, 2001, were $30,795 million in 2002; $25,063 million in 2003; $14,630 million in 2004; $9,907 million in 2005 and $6,469 million in 2006. Committed credit lines of $4.7 billion had been extended to GE by 22 banks at year-end 2001. All of GE's credit lines are available to the Corporation or GE Capital Services. At year-end 2001, the Corporation held committed lines of credit aggregating $28.6 billion, including $12.2 billion of revolving credit agreements pursuant to which it has the right to borrow funds for periods exceeding one year. A total of $4.0 billion of these credit lines were also available for use by GE Capital Services. The Corporation compensates banks for credit facilities in the form of fees, which were insignificant in each of the past three years. Interest rate risk is managed by the Corporation in light of the anticipated behavior, including prepayment behavior, of assets in which debt proceeds are invested. A variety of instruments, including interest rate and currency swaps and currency forwards, are employed to achieve management's interest rate objectives. Effective interest rates are lower under these "synthetic" positions than could have been achieved by issuing debt directly. The following table shows the Corporation's borrowing positions at December 31, 2001 and 2000, considering the effects of currency and interest rate swaps.
2001 2000 ---------------------------------------- --------------- (In millions) Amount Average rate Amount ---------------- ---------------------- --------------- Effective borrowings (including swaps) Short-term (a)......................................... $ 95,981 2.57% $ 75,251 ================ ============== Long-term (including current portion) Fixed rate (b) ...................................... 101,170 5.56 94,703 Floating rate ....................................... 34,031 3.23 26,304 ---------------- -------------- Total long-term ....................................... $ 135,201 $ 121,007 ================ ==============
(a) Includes commercial paper and other short-term debt. (b) Includes fixed rate borrowings and $27.3 billion ($22.9 billion at year-end 2000) notional long-term interest rate swaps that effectively convert the floating-rate nature of short-term borrowings to fixed rates of interest. At December 31, 2001, swap maturities ranged from 2002 to 2048. 41 NOTE 11. INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS Insurance liabilities, reserves and annuity benefits at December 31, 2001 and 2000, are shown below. (In millions) 2001 2000 ----------- ----------- Investment contracts and universal life benefits ....... $ 36,143 $ 31,071 Life insurance benefits (a) ............................ 28,233 29,652 Unpaid claims and claims adjustment expenses (b)........ 4,299 4,143 Unearned premiums ...................................... 3,561 3,439 Separate accounts (see note 9) ......................... 9,988 11,628 ----------- ----------- $ 82,224 $ 79,933 =========== =========== (a) Life insurance benefits are accounted for mainly by a net-level-premium method using estimated yields generally ranging from 2% to 9% in both 2001 and 2000. (b) Principally property and casualty reserves; includes amounts for both reported and incurred-but-not-reported claims, reduced by anticipated salvage and subrogation recoveries. Estimates of liabilities are reviewed and updated continually, with changes in estimated losses reflected in operations. When the Corporation cedes insurance to third parties, it is not relieved of its primary obligation to policyholders. Losses on ceded risks give rise to claims for recovery; allowances for probable losses are established on such receivables from reinsurers as required. A summary of activity affecting unpaid claims and claims adjustment expenses, principally in property and casualty lines, follows.
(In millions) 2001 2000 1999 -------------- -------------- -------------- Balance at January 1 - gross ................................... $ 4,143 $ 3,235 $ 3,721 Less reinsurance recoverables .................................. (542) (552) (578) --------------- --------------- --------------- Balance at January 1 - net ..................................... 3,601 2,683 3,143 Claims and expenses incurred: Current year ................................................. 3,147 3,969 2,286 Prior years .................................................. (156) (155) (328) Claims and expenses paid: Current year ................................................. (1,801) (2,190) (1,210) Prior years .................................................. (1,258) (1,309) (1,276) Claim reserves related to acquired companies ................... - 209 136 Other .......................................................... 209 394 (68) --------------- --------------- --------------- Balance at December 31 - net ................................... 3,742 3,601 2,683 Add reinsurance recoverables ................................... 557 542 552 --------------- --------------- --------------- Balance at December 31 - gross ................................. $ 4,299 $ 4,143 $ 3,235 =============== =============== ===============
Prior-year claims and expenses incurred in the preceding table resulted principally from settling claims established in earlier accident years for amounts that differed from expectations. Financial guarantees and credit life risk of insurance affiliates at December 31, 2001 and 2000, are summarized below.
(In millions) 2001 2000 -------------- --------------- Guarantees, principally on municipal bonds and asset-backed securities ............ $ 213,944 $ 190,184 Mortgage insurance risk in force .................................................. 79,892 68,112 Credit life insurance risk in force ............................................... 16,590 19,910 Less reinsurance .................................................................. (41,148) (42,143) -------------- --------------- $ 269,278 $ 236,063 ============== ===============
Certain GE Capital insurance affiliates offer insurance guaranteeing the timely payment of scheduled principal and interest on municipal bonds and certain asset-backed securities. These insurance affiliates also provide insurance to protect residential mortgage lenders from severe financial loss caused by the non-payment of loans and issue credit life insurance designed to pay the balance due on a loan if the borrower dies before the loan is repaid. As part of their overall risk management process, GE Capital insurance affiliates cede to third parties a portion of their risk associated with these guarantees. In doing so, they are not relieved of their primary obligation to policyholders. 42 The effects of reinsurance on premiums written and premium and commission income were as follows:
Premiums written Premium and commission income ---------------------------------------------- ----------------------------------------------- (In millions) 2001 2000 1999 2001 2000 1999 -------------- -------------- -------------- -------------- -------------- --------------- Direct ............ $ 8,092 $ 7,929 $ 6,378 $ 8,075 $ 7,783 $ 6,108 Assumed ........... 1,056 890 556 1,055 864 583 Ceded ............. (776) (611) (534) (783) (636) (716) -------------- -------------- -------------- -------------- -------------- --------------- Net ............... $ 8,372 $ 8,208 $ 6,400 $ 8,347 $ 8,011 $ 5,975 ============== ============== ============== ============== ============== ===============
Reinsurance recoveries recognized as a reduction of insurance losses and policyholder and annuity benefits amounted to $503 million, $457 million and $386 million for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE 12. MINORITY INTEREST Minority interest in equity of consolidated affiliates includes preferred stock issued by affiliates of GE Capital. The preferred stock primarily pays cumulative dividends at variable rates. Value of the preferred shares is summarized below. (In millions) 2001 2000 -------------- -------------- GE Capital affiliates..................... $ 1,446 $ 1,066 Dividend rates in local currency on the preferred stock ranged from 1.64% to 6.40% during 2001 and from 4.35% to 6.82% during 2000. 43 NOTE 13. SHARE OWNERS' EQUITY Changes in share owners' equity for each of the last three years were as follows:
(In millions) 2001 2000 1999 -------------- -------------- -------------- Variable Cumulative Preferred Stock Issued .................. $ 3 $ 3 $ 3 -------------- -------------- -------------- Common Stock Issued ......................................... 1 1 1 -------------- -------------- -------------- Accumulated nonowner changes other than earnings Balance at January 1 ........................................ (739) (419) 1,026 Cumulative effect of adopting SFAS 133 - net of deferred taxes of ($505)........................................... (810) - - Investment securities - net of deferred taxes of $69, $376 and ($474) ............................................... 116 776 (1,178) Currency translation adjustments - net of deferred taxes of $19, ($185) and ($62)..................................... 36 (344) (115) Derivatives qualifying as hedges - net of deferred taxes of ($413).................................................... (525) - - Reclassification adjustments - Investment Securities - net of deferred taxes of ($182), ($405) and ($82) ...................................... (339) (752) (152) Derivatives qualifying as hedges - net of deferred taxes of $381................................................ 503 - - -------------- -------------- -------------- Balance at December 31 ...................................... (1,758) (739) (419) -------------- -------------- -------------- Other Capital Balance at January 1 ....................................... 7,114 6,150 5,700 Contributions .............................................. 2,649 964 450 -------------- -------------- -------------- Balance at December 31 ..................................... 9,763 7,114 6,150 -------------- -------------- -------------- Retained Earnings Balance at January 1 ....................................... 19,694 17,011 14,340 Net Earnings ............................................... 5,902 4,289 4,208 Dividends .................................................. (2,042) (1,606) (1,537) -------------- -------------- -------------- Balance at December 31 ..................................... 23,554 19,694 17,011 -------------- -------------- -------------- Total Share Owners' Equity ................................. $ 31,563 $ 26,073 $ 22,746 ============== ============== ==============
All common stock is owned by GE Capital Services, all of the common stock of which is in turn owned, directly or indirectly, by GE Company. Changes in fair value of available-for-sale investment securities are reflected, net of applicable taxes and other adjustments, in equity. The changes from year to year were primarily attributable to the effects of changes in year-end market interest rates on the fair value of the securities. During 1999, the Corporation issued 3,000 additional shares of its variable cumulative preferred stock. Dividend rates on the preferred stock ranged from 1.6% to 4.9% during 2001, 4.2% to 5.2% during 2000 and 3.5% to 5.1% during 1999. During 1998, the Corporation authorized 750,000 shares of preferred stock, $0.01 par value, none of which was issued or outstanding at December 31, 2001 or 2000. 44 NOTE 14. OPERATING AND ADMINISTRATIVE EXPENSES Employees and retirees of the Corporation are covered under a number of pension, health and life insurance plans. The principal pension plan is the GE Company Pension Plan, a defined benefit plan, while employees of certain affiliates are covered under separate plans. The Corporation provides health and life insurance benefits to certain of its retired employees, principally through GE Company's benefit program, as well as through plans sponsored by other affiliates. The annual cost to the Corporation of providing these benefits is not material. Rental expense relating to equipment the Corporation leases from others for the purposes of subleasing was $400 million in 2001, $496 million in 2000 and $483 million in 1999. Other rental expense was $570 million in 2001, $646 million in 2000 and $552 million in 1999, principally for the rental of office space and data processing equipment. Minimum future rental commitments under noncancelable leases at December 31, 2001 are $4,983 million; $966 million in 2002; $649 million in 2003; $574 million in 2004; $617 million in 2005; $390 million in 2006 and $1,787 million thereafter. The Corporation, as a lessee, has no material lease agreements classified as capital leases. Amortization of deferred insurance acquisition costs charged to operations in 2001, 2000 and 1999 was $939 million, $1,225 million and $1,031 million, respectively. NOTE 15. INCOME TAXES The provision for income taxes is summarized in the following table.
(In millions) 2001 2000 1999 --------------- --------------- -------------- Current tax expense ..............................................$ 1,029 $ 1,041 $ 699 Deferred tax expense from temporary differences .................. 705 514 854 --------------- --------------- -------------- $ 1,734 $ 1,555 $ 1,553 =============== =============== ==============
GE Company files a consolidated U.S. federal income tax return which includes the Corporation. The provision for current tax expense includes the effect of the Corporation on the consolidated return. Current tax expense (benefit) includes amounts applicable to U.S. federal income taxes of $300 million, $274 million and, ($142) million in 2001, 2000 and 1999, respectively, and amounts applicable to non-U.S. jurisdictions of $697 million, $749 million and $765 million in 2001, 2000 and 1999, respectively. Deferred tax expense related to U.S. federal income taxes was $722 million, $426 million and $833 million in 2001, 2000 and 1999, respectively. Deferred income tax balances reflect the impact of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Except for certain earnings that the Corporation intends to reinvest indefinitely, provision has been made for the estimated U.S. federal income tax liabilities applicable to undistributed earnings of affiliates and associated companies. It is not practicable to determine the U.S. federal income tax liability, if any, that would be payable if such earnings were not reinvested indefinitely. U.S. income before taxes and cumulative effect of accounting changes was $3.9 billion in 2001, $2.7 billion in 2000 and $3.5 billion in 1999. The corresponding amounts for non-U.S. based operations were $3.9 billion in 2001, $3.1 billion in 2000 and $2.3 billion in 1999. A reconciliation of the U.S. federal statutory rate to the actual income tax rate follows.
2001 2000 1999 --------------- --------------- --------------- Statutory U.S. federal income tax rate .......................... 35.0% 35.0% 35.0% Increase (reduction) in rate resulting from: Amortization of goodwill ....................................... 0.6 1.1 0.9 Tax-exempt income .............................................. (2.1) (2.8) (2.7) Tax on international activities including exports............... (5.3) (5.1) (5.2) Americom / Rollins goodwill..................................... (2.9) - - Other - net .................................................... (3.1) (1.6) (1.0) --------------- --------------- --------------- Actual income tax rate .......................................... 22.2% 26.6% 27.0% =============== =============== ===============
45 Principal components of the net deferred tax liability balances at December 31, 2001 and 2000, were as follows: (In millions) 2001 2000 ------------- ------------- Assets: Allowance for losses .................... $ 2,107 $ 1,649 Insurance reserves ...................... 1,382 1,252 AMT credit carryforwards................. 695 671 Other ................................... 4,886 3,185 ------------- ------------- Total deferred tax assets ................. 9,070 6,757 ------------- ------------- Liabilities: Financing leases ........................ 9,128 8,423 Operating leases ........................ 3,397 3,300 Deferred insurance acquisition costs..... 1,000 719 Other ................................... 3,656 2,579 ------------- ------------- Total deferred tax liabilities ............ 17,181 15,021 ------------- ------------- Net deferred tax liability ................ $ 8,111 $ 8,264 ============= ============= NOTE 16. OPERATING SEGMENT DATA The Corporation's operating segments are organized based on the nature of products and services provided. A description of the operating segments can be found in Item 1. Business under the heading Operating Segments on page 3 of this report. The accounting policies for these segments are the same as those described for the consolidated entity. The Corporation evaluates the performance of its operating segments primarily on the basis of earnings before accounting changes. Details of total revenues and earnings before accounting changes by operating segment are provided in Item 7. Management's Discussion and Analysis of Results of Operations in the tables beginning on page 16 of this report. Other specific information is provided as follows.
(In millions) Depreciation and amortization (a) Provision for income taxes -------------------------------------- -------------------------------------- For the years ended December 31 2001 2000 1999 2001 2000 1999 ------------ ------------ ----------- ----------- ----------- ------------ Consumer Services .................. $ 951 $ 1,934 $ 1,042 $ 775 $ 612 $ 346 Equipment Management ............... 2,431 2,421 2,440 561 389 317 Mid-Market Financing ............... 961 722 564 460 370 401 Specialized Financing .............. 27 27 48 1 406 293 Specialty Insurance ................ 31 12 26 186 49 111 All other .......................... 63 192 108 (249) (271) 85 ------------ ------------ ----------- ----------- ----------- ------------ Total ........................... $ 4,464 $ 5,308 $ 4,228 $ 1,734 $ 1,555 $ 1,553 ============ ============ =========== =========== =========== ============
Time sales, loan, investment and other income (b) Interest expense -------------------------------------- -------------------------------------- For the years ended December 31 2001 2000 1999 2001 2000 1999 ------------ ------------ ----------- ----------- ----------- ------------ Consumer Services .................. $ 15,167 $ 15,805 $ 12,776 $ 3,075 $ 3,544 $ 3,332 Equipment Management ............... 3,147 2,358 2,318 1,891 1,796 1,598 Mid-Market Financing ............... 5,010 4,014 3,508 3,554 3,134 2,457 Specialized Financing .............. 2,365 3,579 2,676 1,561 1,630 1,349 Specialty Insurance ................ 856 852 701 422 458 369 All other .......................... (290) 369 304 (478) (101) (169) ------------ ------------ ----------- ----------- ----------- ------------ Total ........................... $ 26,255 $ 26,977 $ 22,283 $ 10,025 $ 10,461 $ 8,936 ============ ============ =========== =========== =========== ============
46
Property, plant and equipment additions (including equipment Assets leased to others) (c) At December 31 For the years ended December 31 --------------------------------------- -------------------------------------- 2001 2000 1999 2001 2000 1999 ------------- ------------ ----------- ----------- ----------- ------------ Consumer Services (d) ............. $ 165,196 $ 159,619 $ 147,455 $ 571 $ 763 $ 2,332 Equipment Management (d) .......... 52,195 48,081 43,141 9,594 8,298 8,011 Mid-Market Financing .............. 108,188 71,295 62,768 3,420 1,634 3,954 Specialized Financing (d).......... 40,169 36,917 33,914 11 533 150 Specialty Insurance ............... 13,576 13,697 10,182 1 6 9 All other ......................... 1,752 3,027 9,981 72 152 949 ------------- ------------ ----------- ----------- ----------- ------------ Total .......................... $ 381,076 $ 332,636 $ 307,441 $ 13,669 $ 11,386 $ 15,405 ============= ============ =========== =========== =========== ============
(a) Includes amortization of goodwill and other intangibles. (b) Principally interest income. (c) Additions to property, plant and equipment (including equipment leased to others) include amounts relating to principal businesses purchased. (d) Total assets of the Consumer Services, Equipment Management and Specialized Financing segments at December 31, 2001, include investments in and advances to non-consolidated affiliates of $4,636 million, $5,164 million and $3,856 million, respectively, which contributed approximately $304 million, $233 million and $17 million, respectively, to segment pre-tax income for the year ended December 31, 2001. NOTE 17. QUARTERLY FINANCIAL DATA (unaudited) Summarized quarterly financial data were as follows:
First quarter Second quarter Third quarter Fourth quarter -------------------- -------------------- --------------------- ----------------------- (In millions) 2001 2000 2001 2000 2001 2000 2001 2000 --------- --------- ---------- --------- --------- ----------- ---------- ----------- Revenues ................. $ 12,078 $ 13,305 $ 11,678 $ 13,732 $ 11,622 $ 13,714(b) $ 13,167(a) $ 13,516(b) --------- --------- ---------- --------- --------- ----------- ----------- ----------- Expenses: Interest ................. 2,744 2,424 2,512 2,660 2,358 2,592 2,411 2,785 Operating and administrative and cost of goods sold .... 4,375 6,134 4,031 6,221 3,684 5,855 4,641 6,706 Insurance losses and policy-holder and annuity benefits ...... 1,940 1,528 2,113 2,166 1,961 2,123 2,157 1,880 Provision for losses on financing receivables . 460 508 447 406 521 448 884 613 Depreciation and amortization of buildings and equipment and equipment on operating leases ................ 787 936 791 665 917 786 933 901 Minority interest in net earnings of consolidated affiliates ............ 30 19 17 21 15 22 22 24 --------- --------- --------- --------- --------- ----------- ----------- ----------- Earnings before income taxes ................. 1,742 1,756 1,767 1,593 2,166 1,888 2,119 607 Provision for income taxes ................. (402) (549) (341) (391) (495) (568) (496) (47) --------- --------- --------- --------- --------- ----------- ----------- ----------- Earnings before accounting changes .... $ 1,340 $ 1,207 $ 1,426 $ 1,202 $ 1,671 $ 1,320(c) $ 1,623 $ 560(d) ========= ========= ========= ========= ========= =========== =========== ===========
(a) Fourth quarter revenues in 2001 were increased by a gain on the sale of Americom of $1,158 million. (b) Third and fourth quarter revenues in 2000 were increased by the inclusion of gains related to PaineWebber of $193 million and $26 million, respectively. (c) Third quarter net earnings in 2000 were reduced by after-tax charges of $239 million. Such charges were primarily included in Operating and administrative and cost of goods sold. Also in the third quarter, net earnings were increased by the inclusion of an after-tax gain of $117 million related to PaineWebber. (d) Fourth quarter net earnings in 2000 were reduced by after-tax charges of $645 million. Such charges were primarily included in Operating and administrative and cost of goods sold. Also in the fourth quarter, net earnings were increased by the inclusion of an after-tax gain of $622 million related to PaineWebber. 47 NOTE 18. RESTRICTED NET ASSETS OF AFFILIATES Certain of the Corporation's consolidated affiliates are restricted from remitting funds to the Parent in the form of dividends or loans by a variety of regulations, the purpose of which is to protect affected insurance policyholders, depositors or investors. At year-end 2001, net assets of the Corporation's regulated affiliates amounted to $28.2 billion, of which $22.9 billion was restricted. At December 31, 2001 and 2000, the aggregate statutory capital and surplus of the insurance businesses totaled $11.7 billion and $11.1 billion respectively. Accounting practices prescribed by statutory authorities are used in preparing statutory statements. NOTE 19. SUPPLEMENTAL CASH FLOWS INFORMATION "All other operating activities" in the Statement of Cash Flows consists primarily of adjustments to current and noncurrent accruals and deferrals of costs and expenses, adjustments for gains and losses on assets, increases and decreases in assets held for sale, and adjustments to assets. Certain supplemental information related to the Corporation's cash flows were as follows for the past three years.
(In millions) 2001 2000 1999 -------------- -------------- -------------- Financing receivables Increase in loans to customers .................................. $ (136,423) $ (97,735) $ (92,314) Principal collections from customers - loans .................... 117,268 84,383 83,629 Investment in equipment for financing leases .................... (19,969) (15,453) (18,173) Principal collections from customers - financing leases ......... 11,973 7,986 13,618 Net change in credit card receivables ........................... (15,230) (8,983) (9,122) Sales of financing receivables .................................. 29,291 14,405 11,473 -------------- -------------- -------------- $ (13,090) $ (15,397) $ (10,889) ============== ============== ============== All other investing activities Purchases of securities by insurance and annuity businesses ..... $ (35,071) $ (24,985) $ (15,897) Dispositions and maturities of securities by insurance and annuity businesses ........................................... 28,189 14,465 13,432 Proceeds from principal business dispositions ................... 2,572 (605) 176 Other ........................................................... (2,005) (2,524) (5,893) -------------- -------------- -------------- $ (6,315) $ (13,649) $ (8,182) ============== ============== ============== Newly issued debt having maturities longer than 90 days Short-term (91 to 365 days) ..................................... $ 12,622 $ 12,782 $ 15,799 Long-term (longer than one year) ................................ 16,104 31,598 29,033 Proceeds - nonrecourse, leveraged lease debt .................... 2,012 1,808 1,724 -------------- -------------- -------------- $ 30,738 $ 46,188 $ 46,556 ============== ============== ============== Repayments and other reductions of debt having maturities longer than 90 days Short-term (91 to 365 days) ..................................... $ (29,195) $ (27,777) $ (21,211) Long-term (longer than one year) ................................ (6,582) (3,953) (5,447) Principal payments - nonrecourse, leveraged lease debt .......... (274) (177) (266) -------------- -------------- -------------- $ (36,051) $ (31,907) $ (26,924) ============== ============== ============== All other financing activities Proceeds from sales of investment contracts ..................... $ 8,113 $ 8,717 $ 7,092 Redemption of investment contracts .............................. (6,802) (8,828) (6,965) Preferred stock issued by consolidated affiliates................ - - 213 Preferred stock issued in excess of par.......................... - - 300 Capital contributions from GE Capital Services................... 2,649 895 - Cash received upon assumption of Toho Mutual Life Insurance Company insurance liabilities................................. - 13,177 - -------------- -------------- -------------- $ 3,960 $ 13,961 $ 640 ============== ============== ============== Cash paid during the year for: Interest ........................................................ $ (10,246) $ (10,564) $ (9,194) Income taxes .................................................... (269) (595) (246)
48 Changes in operating assets and liabilities are net of acquisitions and dispositions of principal businesses. "Payments for principal businesses purchased" in the Statement of Cash Flows is net of cash acquired and includes debt assumed and immediately repaid in acquisitions. In conjunction with the acquisitions, liabilities were assumed as follows: (In millions) 2001 2000 1999 ------------- ------------- ------------- Fair value of assets acquired .......$ 36,007 $ 10,544 $ 14,888 Cash paid ........................... (11,980) (1,230) (9,737) ------------- ------------- ------------- Liabilities assumed .................$ 24,027 $ 9,314 $ 5,151 ============= ============= ============= NOTE 20. ADDITIONAL INFORMATION ABOUT CERTAIN FINANCIAL INSTRUMENTS Assets and liabilities that are reflected in the accompanying financial statements at fair value are not included in the following disclosures; such items include cash and equivalents, investment securities, separate accounts and, beginning in 2001, derivative financial instruments. Other assets and liabilities - those not carried at fair value - are discussed in the following pages. Apart from certain borrowings by GE Capital and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. Although management has made every effort to develop the fairest representation of fair value for this section, it would be unusual if the estimates could actually have been realized at December 31, 2001 or 2000. A description of how fair values are estimated follows. Borrowings. Based on market quotes or comparables. Time sales and loans. Based on quoted market prices, recent transactions and/or discounted future cash flows, using rates at which similar loans would have been made to similar borrowers. Investment contract benefits. Based on expected future cash flows, discounted at currently offered discount rates for immediate annuity contracts or cash surrender values for single premium deferred annuities. Financial guarantees and credit life. Based on expected future cash flows, considering expected renewal premiums, claims, refunds and servicing costs, discounted at a current market rate. All other instruments. Based on comparable market transactions, discounted future cash flows, quoted market prices, and/or estimates of the cost to terminate or otherwise settle obligations. 49 Financial Instruments
2001 2000 --------------------------------------------- ----------------------------------------------- Assets (liabilities) Assets (liabilities) ---------------------------------- ----------------------------------- Carrying Estimated fair value Carrying Estimated fair value Notional amount --------------------- Notional amount ---------------------- (In millions) amount (net) High Low amount (net) High Low --------- ---------- --------- --------- --------- ---------- --------- ---------- Assets Time sales and loans ....... $ (a) $ 116,664 $ 118,084 $ 116,028 $ (a) $ 90,246 $ 90,870 $ 89,691 Mortgages acquired for resale .................... (a) 1,596 1,631 1,596 (a) 1,267 1,250 1,245 Other financial instruments ............... (a) 9,451 9,625 9,553 (a) 10,847 11,035 11,007 Liabilities Borrowings (b) (c) .......... (a) (231,182) (234,182) (234,182) (a) (196,258) (198,526) (198,526) Investment contract benefits .................. (a) (30,581) (30,341) (29,964) (a) (26,514) (25,105) (25,105) Insurance - financial guarantees and credit life (d)................... 269,278 (2,932) (2,973) (3,078) 236,063 (2,740) (2,777) (2,882) Other financial instruments ............... 4,678 (629) (590) (590) 2,982 (1,184) (1,114) (1,114) Special purpose entity support Credit and liquidity (e)(f).. 41,513 (597) (597) (597) 28,977 (492) (492) (492) Credit and liquidity - unused..................... 9,404 - - - 6,470 - - - Performance guarantees....... 3,759 - - - 2,870 (g) - - - - unused................... 441 - - - 1,330 (g) - - - Swap guarantees and other guarantees................. 7,131 - - - 6,260 (g) - - - Other firm commitments Ordinary course of business lending commitments ....... 9,636 - - - 9,450 - - - Unused revolving credit lines Commercial ................ 27,770 - - - 19,372 (h) - - - Consumer - principally credit cards.............. 211,695 - - - 171,112 - - -
(a) These financial instruments do not have notional amounts. (b) Includes effects of interest rate and currency swaps. (c) See note 10. (d) See note 11. (e) Includes credit support of $14,345 million and $9,633 million at December 31, 2001 and 2000, respectively. (f) Pre-tax gains on sales of financial assets through securitizations amounted to $1,327 million and $489 million in 2001 and 2000, respectively. (g) Reported, in total, as $6,740 million in 2000. (h) Reported as $11,278 million in 2000. Derivatives and Hedging. The Corporation's global business activities routinely deal with fluctuations in interest rates, in currency exchange rates and in commodity and other asset prices. The Corporation applies strict policies to managing each of these risks, including prohibitions on derivatives trading, derivatives market-making or other speculative activities. These policies require the use of derivative instruments in concert with other techniques to reduce or eliminate these risks. On January 1, 2001, the Corporation adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as discussed in note 1. The paragraphs that follow provide additional information about derivatives and hedging relationships in accordance with the requirements of SFAS 133. Cash flow hedges. Under SFAS 133, cash flow hedges are hedges that use simple derivatives to offset the variability of expected future cash flows. Variability can appear in floating rate assets, floating rate liabilities or from certain types of forecasted transactions, and can arise from changes in interest rates or currency exchange rates. For example, the Corporation often borrows funds at a variable rate of interest. If the Corporation needs the funds to make a floating rate loan, there is no exposure to interest rate changes, and no hedge is necessary. However, if a fixed rate loan is made, the Corporation will contractually commit to pay a fixed rate of interest to a counterparty who will pay the Corporation a variable rate of interest (an "interest rate swap"). This swap will then be designated as a cash flow hedge of the associated variable rate borrowing. If, as would be expected, the derivative is perfectly effective in offsetting variable interest in the borrowing, changes in its fair value are recorded in a separate component in equity and released to earnings contemporaneously with the earnings effects of the hedged item. Further information about hedge effectiveness is provided below. The Corporation uses currency forwards, interest rate swaps and currency swaps, to optimize borrowing costs and investment returns. For example, currency swaps and non-functional currency borrowings together provide lower funding costs than could be achieved by issuing debt directly in a given currency. 50 Adoption of SFAS 133 resulted in a reduction of share owners' equity of $810 million at January 1, 2001. Of that amount, $288 million was transferred to earnings in 2001 along with the earnings effects of the related forecasted transactions for no net impact on earnings. At December 31, 2001, amounts related to derivatives qualifying as cash flow hedges amounted to a reduction of equity of $832 million, of which $560 million was expected to be transferred to earnings in 2002 along with the earnings effects of the related forecasted transactions. In 2001, there were no forecasted transactions that failed to occur. At December 31, 2001, the term of derivative instruments hedging forecasted transactions, except those related to variable interest on existing financial instruments, was zero. Fair value hedges. Under SFAS 133, fair value hedges are hedges that eliminate the risk of changes in the fair values of assets, liabilities and certain types of firm commitments. For example, the Corporation will use an interest rate swap in which it receives a fixed rate of interest and pays a variable rate of interest to change the cash flow profile of a fixed rate borrowing to match the variable rate financial asset that it is funding. Changes in fair value of derivatives designated and effective as fair value hedges are recorded in earnings and are offset by corresponding changes in the fair value of the hedged item. The Corporation uses interest rate swaps, currency swaps and interest rate and currency forwards to hedge the effect of interest rate and currency exchange rate changes on local and nonfunctional currency denominated fixed-rate borrowings and certain types of fixed-rate assets. Equity options are used to hedge price changes in investment securities and equity-indexed annuity liabilities at the Corporation. Net investment hedges. The net investment hedge designation under SFAS 133 refers to the use of derivative contracts or cash instruments to hedge the foreign currency exposure of a net investment in a foreign operation. At the Corporation, currency exposures that result from net investments in affiliates are managed principally by funding assets denominated in local currency with debt denominated in that same currency. In certain circumstances, such exposures are managed using currency forwards and currency swaps. Derivatives not designated as hedges. SFAS 133 specifies criteria that must be met in order to apply any of the three forms of hedge accounting. For example, hedge accounting is not permitted for hedged items that are marked to market through earnings. The Corporation uses derivatives to hedge exposures when it makes economic sense to do so, including circumstances in which the hedging relationship does not qualify for hedge accounting as described in the following paragraph. The Corporation also will occasionally receive derivatives, such as equity warrants, in the ordinary course of business. Under SFAS 133, derivatives that do not qualify for hedge accounting are marked to market through earnings. The Corporation uses option contracts, including caps, floors and collars, as an economic hedge of changes in interest rates, currency exchange rates and equity prices on certain types of assets and liabilities. For example, the Corporation uses equity options to hedge the risk of changes in equity prices embedded in insurance liabilities associated with annuity contracts written by GE Financial Assurance. The Corporation also uses interest rate swaps, purchased options and futures as an economic hedge of the fair value of mortgage servicing rights. The Corporation occasionally obtains equity warrants as part of sourcing or financing transactions. Although these instruments are considered to be derivatives under SFAS 133, their economic risk is similar to, and managed on the same basis as, other equity instruments held by the Corporation. Earnings effects of derivatives. The table that follows provides additional information about the earnings effects of derivatives. In the context of hedging relationships, "effectiveness" refers to the degree to which fair value changes in the hedging instrument offset corresponding fair value changes in the hedged item. Certain elements of hedge positions cannot qualify for hedge accounting under SFAS 133 whether effective or not, and must therefore be marked to market through earnings. Time value of purchased options is the most common example of such elements in instruments used by the Corporation. Earnings effects of such items are shown in the following table as "amounts excluded from the measure of effectiveness."
December 31, 2001 (In millions) Cash flow hedges Fair value hedges ---------------------- --------------------- Ineffectiveness...............................................$ 7 $ 28 Amounts excluded from the measure of effectiveness............. - (21)
At December 31, 2001, the fair value of derivatives in a gain position and recorded in "All other assets" is $1.7 billion and the fair value of derivatives in a loss position and recorded in "All other liabilities" is $3.3 billion. The following table provides fair value information about derivative instruments for the year 2000. Following adoption of SFAS 133 on January 1, 2001, all derivative instruments are reported at fair value in the financial statements and similar disclosures for December 31, 2001, are not relevant. 51
2000 ------------------------------------------------------------------ Assets (liabilities) ---------------------------------------------- Carrying Notional amount Estimated (In millions) amount (net) fair value ---------------- --------------------- ------------------- Assets Integrated swaps........................ $ 21,893 $ (37) $ (744) Purchased options....................... 9,832 105 164 Options, including "floors"............. 21,775 196 196 Interest rate swaps and futures......... 2,798 29 38 Liabilities Interest rate swaps..................... 51,081 - (165) Currency swaps.......................... 24,314 - (957) Currency forwards....................... 27,381 - 379 Other firm commitments Currency forwards....................... 1,585 8 47
Counterparty credit risk. The risk that counterparties to derivative contracts will be financially unable to make payments to the Corporation according to the terms of the agreements is counterparty credit risk. Counterparty credit risk is managed on an individual counterparty basis, which means that gains and losses are netted for each counterparty to determine the amount at risk. When a counterparty exceeds credit exposure limits in terms of amounts due to the Corporation, typically as a result of changes in market conditions (see table below), no additional transactions are executed until the exposure with that counterparty is reduced to an amount that is within the established limit. All swaps are executed under master swap agreements containing mutual credit downgrade provisions that provide the ability to require assignment or termination in the event either party is downgraded below A3 or A-. If the downgrade provisions had been triggered at December 31, 2001, the Corporation could have been required to disburse up to $2.7 billion and could have claimed $0.4 billion from counterparties - the net fair value losses and gains. At December 31, 2001 and 2000, gross fair value gains amounted to $2.5 billion and $2.7 billion, respectively. At December 31, 2001 and 2000, gross fair value losses amounted to $4.8 billion and $3.7 billion, respectively. As part of its ongoing activities, the Corporation enters into swaps that are integrated into investments in or loans to particular customers. Such integrated swaps not involving assumption of third-party credit risk are evaluated and monitored like their associated investments or loans and are not therefore subject to the same credit criteria that would apply to a stand-alone position. Except for such positions, all other swaps, purchased options and forwards with contractual maturities longer than one year are conducted within the credit policy constraints provided in the table below. Foreign exchange forwards with contractual maturities shorter than one year must be executed with counterparties having an A-1+/ P-1 credit rating and the credit limit for these transactions is $150 million. Counterparty credit criteria Credit rating ------------------------------- Standard & Moody's Poor's -------------- -------------- Term of transaction Between one and five years ........ Aa3 AA- Greater than five years ........... Aaa AAA Credit exposure limits Up to $50 million ................. Aa3 AA- Up to $75 million ................. Aaa AAA 52 NOTE 21. GEOGRAPHIC SEGMENT INFORMATION The table below presents data by geographic region. Revenues shown below are classified according to their country of origin.
Revenues Long-lived assets (c) For the years ended December 31 At December 31 ----------------------------------------- --------------------------------------- (In millions) 2001 2000 1999 2001 2000 1999 - ----------------------------------------- ------------ ------------ ------------ ------------ ----------- United States ............. $ 28,860 $ 32,361 $ 28,618 $ 10,203 $ 10,951 $ 12,917 Europe .................... 9,304 10,154 10,363 3,397 3,181 3,446 Pacific Basin ............. 5,806 7,147 3,722 986 1,146 1,311 Global (a) ................ 2,291 2,134 1,788 12,979 10,763 8,959 Other (b) ................. 2,284 2,471 2,114 1,647 1,615 1,698 ------------ ------------ ------------ ------------ ------------ ------------ Total .................. $ 48,545 $ 54,267 $ 46,605 $ 29,212 $ 27,656 $ 28,331 ============ ============ ============ ============ ============ ============
(a) Consists of operations that cannot meaningfully be associated with specific geographic areas (for example, commercial aircraft and shipping containers used on ocean-going vessels). (b) Principally the Americas other than the United States. (c) Property, plant and equipment (including equipment leased to others). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable 53 PART III Item 10. Directors and Executive Officers of the Registrant. Omitted Item 11. Executive Compensation. Omitted Item 12. Security Ownership of Certain Beneficial Owners and Management. Omitted Item 13. Certain Relationships and Related Transactions. Omitted 54 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements Included in Part II of this report: Independent Auditors' Report Statement of Earnings for each of the years in the three-year period ended December 31, 2001 Statement of Changes in Share Owners' Equity for each of the years in the three-year period ended December 31, 2001 Statement of Financial Position at December 31, 2001 and 2000 Statement of Cash Flows for each of the years in the three-year period ended December 31, 2001 Notes to Consolidated Financial Statements Incorporated by reference: The consolidated financial statements of General Electric Company, set forth in the Annual Report on Form 10-K of General Electric Company (S.E.C. File No. 001-00035) for the year ended December 31, 2001 (pages F-1 through F-52) and Exhibit 12 (Ratio of Earnings to Fixed Charges) of General Electric Company. (a) 2. Financial Statement Schedules Schedule I. Condensed financial information of registrant. All other schedules are omitted because of the absence of conditions under which they are required or because the required information is shown in the financial statements or notes thereto. (a) 3. Exhibit Index The exhibits listed below, as part of Form 10-K, are numbered in conformity with the numbering used in Item 601 of Regulation S-K of the Securities and Exchange Commission. Exhibit Number Description ------------ -------------------- 2(a) Agreement and Plan of Merger dated June 25, 2001, between the Corporation and GECS Merger Sub, Inc. (Incorporated by reference to Exhibit 2.1 of the Corporation's Current Report on Form 8-K dated as of July 3, 2001.) 3(i) The Corporation's Certificate of Merger and Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on June 29, 2001 and June 27, 2001, respectively. 3(ii) A complete copy of the By-Laws of the Corporation as last amended on June 30, 1994, and currently in effect. (Incorporated by reference to Exhibit 3(ii) of the Corporation's Form 10-K Report for the year ended December 31, 1994). 4(a) Second Amended and Restated Fiscal and Paying Agency Agreement dated as of March 31, 1999 among the Corporation, GE Capital Australia, GE Capital Australia Funding Pty Ltd, GE Capital Finance Australia, General Electric Capital Canada, Inc., GE Capital Canada Funding Company, GE Capital Canada Retailer Financial Services Company and The Chase Manhattan Bank, London Branch (Incorporated by reference to Exhibit 4(ee) to the Corporation's Post-Effective Amendment No. 4 to Registration Statement on Form S-3, File No. 333-59707). 55 4(b) Form of Euro Medium-Term Note and Debt Security - Temporary Global Fixed Rate Bearer Note (Incorporated by reference to Exhibit 4(u) to the Corporation's Registration Statement on Form S-3, File No. 333-66560). 4(c) Form of Euro Medium-Term Note and Debt Security - Permanent Global Fixed Rate Bearer Note (Incorporated by reference to Exhibit 4(v) to the Corporation's Registration Statement on Form S-3, File No. 333-66560). 4(d) Form of Euro Medium-Term Note and Debt Security - Temporary Global Floating Rate Bearer Note (Incorporated by reference to Exhibit 4(x) to the Corporation's Post-Effective Amendment No. 4 to Registration Statement on Form S-3, File No. 333-66560). 4(e) Form of Euro Medium-Term Note and Debt Security - Permanent Global Floating Rate Bearer Notes (Incorporated by reference to Exhibit 4(y) to the Corporation's Registration Statement on Form S-3, File No. 333-66560). 4(f) Form of Euro Medium-Term Note and Debt Security - Definitive Global Fixed Rate Bearer Note (Incorporated by reference to Exhibit 4(w) to the Corporation's Registration Statement on Form S-3, File No. 333-66560). 4(g) Form of Euro Medium-Term Note and Debt Security - Definitive Global Floating Rate Bearer Note (Incorporated by reference to Exhibit 4(z) to the Corporation's Registration Statement on Form S-3, File No. 333-66560). 4(h) Agreement to furnish to the Securities and Exchange Commission upon request a copy of instruments defining the rights of holders of certain long-term debt of the registrant and all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. 12(a) Computation of ratio of earnings to fixed charges. 12(b) Computation of ratio of earnings to combined fixed charges and preferred stock dividends. 23(ii) Consent of KPMG LLP. 24 Power of Attorney. 99(a) Income Maintenance Agreement dated March 28, 1991, between General Electric Company and the Corporation. (Incorporated by reference to Exhibit 28(a) of the Corporation's Form 10-K Report for the year ended December 31, 1992). 99(b) The consolidated financial statements of General Electric Company, set forth in the Annual Report on Form 10-K of General Electric Company (S.E.C. File No. 001-00035) for the year ended December 31, 2001, (pages F-1 through F-52) and Exhibit 12 (Ratio of Earnings to Fixed Charges) of General Electric Company. 99(c) Letter, dated February 4, 1999 from Dennis D. Dammerman of General Electric Company to Denis J. Nayden of General Electric Capital Corporation pursuant to which General Electric Company agrees to provide additional equity to General Electric Capital Corporation in conjunction with certain redemptions by General Electric Capital Corporation of shares of its Variable Cumulative Preferred Stock. (Incorporated by reference to Exhibit 99(g) to the Corporation's Post-Effective Amendment No. 1 to Registration Statement on Form S-3, File No. 333-59707). 56 (b) Reports on Form 8-K A Current Report on Form 8-K was filed on July 3, 2001, under Item 5 to disclose that, the Registrant was reincorporated as a Delaware business corporation (the "Reincorporation"). The Reincorporation was effected by means of the merger (the "Merger") of the Registrant's existing New York corporation ("GE Capital-NY") with and into a newly-formed corporation organized under the Delaware General Corporation Law ("GE Capital-DE"). GE Capital-DE was the surviving corporation in the Merger and upon consummation of the Merger, changed its name to "General Electric Capital Corporation." As a result of the Merger, GE Capital-DE succeeded to and assumed all rights and obligations of GE Capital-NY, and immediately after the Merger GE Capital-DE had the same assets and liabilities as GE Capital-NY had immediately prior to the Merger. The directors and officers of GE Capital-NY immediately prior to the Merger became the directors and officers of GE Capital-DE upon consummation of the Merger. Apart from the change in its state of incorporation, the Merger had no effect on GE Capital-NY's business, management, employees, fiscal year, assets or liabilities, or location of its facilities (including corporate headquarters), and did not result in any relocation of management or other employees. In addition, pursuant to the Merger, GE Capital-NY's obligations under its contracts, agreements, and guarantees were assumed by GE Capital-DE. 57
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT GENERAL ELECTRIC CAPITAL CORPORATION CONDENSED STATEMENT OF CURRENT AND RETAINED EARNINGS For the years ended December 31 (In millions) 2001 2000 1999 ------------- ------------- ------------- REVENUES ......................................................... $ 6,863 $ 6,596 $ 5,527 ------------- ------------- ------------- EXPENSES Interest, net of allocations ..................................... 6,795 7,338 7,096 Operating and administrative ..................................... 1,865 1,937 1,904 Provision for losses on financing receivables .................... 485 307 241 Depreciation and amortization .................................... 417 332 530 ------------- ------------- ------------- Total expenses............................................... 9,562 9,914 9,771 ------------- ------------- ------------- Loss before income taxes and equity in earnings of affiliates .... (2,699) (3,318) (4,244) Income tax benefit ............................................... 555 965 1,734 Equity in earnings of affiliates ................................. 8,204 6,642 6,718 Cumulative effect of accounting changes, net of tax............... (158) - - ------------- ------------- ------------- NET EARNINGS ..................................................... 5,902 4,289 4,208 Dividends paid ................................................... (2,042) (1,606) (1,537) Retained earnings at January 1 ................................... 19,694 17,011 14,340 ------------- ------------- ------------- RETAINED EARNINGS AT DECEMBER 31 ................................. $ 23,554 $ 19,694 $ 17,011 ============= ============= =============
See notes to Condensed Financial Statements. 58
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (Continued) GENERAL ELECTRIC CAPITAL CORPORATION CONDENSED STATEMENT OF FINANCIAL POSITION At December 31 (In millions) 2001 2000 ------------ ----------- ASSETS Cash and equivalents ............................................................. $ 719 $ - Investment securities ............................................................ 4,448 3,789 Financing receivables: Time sales and loans ............................................................ 33,847 29,797 Investment in financing leases .................................................. 16,019 14,907 ------------ ----------- 49,866 44,704 Allowance for losses on financing receivables ................................... (1,211) (1,047) ------------ ----------- Financing receivables - net .................................................. 48,655 43,657 Investments in and advances to affiliates ........................................ 153,391 130,551 Equipment on operating leases (at cost), less accumulated amortization of $842 and $855 ................................ 3,378 3,341 Other assets ..................................................................... 14,882 16,337 ------------ ----------- Total assets ................................................................. $ 225,473 $ 197,675 ============ =========== LIABILITIES AND SHARE OWNERS' EQUITY Short-term borrowings ............................................................ $ 121,020 $ 91,522 Long-term borrowings ............................................................. 60,367 69,704 ------------ ----------- Total borrowings.............................................................. 181,387 161,226 Other liabilities ................................................................ 9,510 7,729 Deferred income taxes ............................................................ 3,013 2,647 ------------ ----------- Total liabilities ............................................................ $ 193,910 $ 171,602 ------------ ----------- Variable cumulative preferred stock, $100 par value, liquidation preference $100,000 per share (33,000 shares authorized at December 31, 2001 and 2000 and 26,000 shares outstanding at December 31, 2001 and 2000) ................... 3 3 Common stock, $0.01 par value (3,866,000 shares authorized and 3,837,825 shares outstanding at December 31, 2001 and 2000, respectively)........................ 1 1 Additional paid-in capital ....................................................... 9,763 7,114 Retained earnings ................................................................ 23,554 19,694 Accumulated gains/(losses) - net: Investment securities (a) ...................................................... (362) (139) Currency translation adjustments (a) ........................................... (564) (600) Derivatives qualifying as hedges (a) ........................................... (832) - ------------- ------------ Total share owners' equity ................................................... 31,563 26,073 ------------- ------------ Total liabilities and share owners' equity ................................... $ 225,473 $ 197,675 ============= ============
(a) The sum of accumulated gains/(losses) on investment securities, currency translation adjustments and derivatives qualifying as hedges constitutes "Accumulated nonowner changes other than earnings," and was ($1,758) and ($739) million at year-end 2001 and 2000, respectively. See notes to Condensed Financial Statements. 59
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (Continued) GENERAL ELECTRIC CAPITAL CORPORATION CONDENSED STATEMENT OF CASH FLOWS For the years ended December 31 (In millions) 2001 2000 1999 ------------- ------------- --------------- CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES $ (1,048) $ 2,100 $ (1,537) ------------- ------------- --------------- CASH FLOWS USED FOR INVESTING ACTIVITIES Increase in loans to customers ...................................... (84,290) (57,198) (58,899) Principal collections from customers - loans ........................ 80,098 52,260 55,114 Investment in equipment for financing leases ........................ (6,545) (4,687) (4,712) Principal collections from customers - financing leases ............. 4,569 2,493 2,788 Net change in credit card receivables ............................... (102) (48) 193 Buildings, equipment and equipment on operating leases - additions ...................................................... (1,042) (1,494) (1,710) - dispositions ................................................... 702 2,007 976 Payments for principal businesses purchased, net of cash acquired ... (10,993) (1,176) (9,823) Proceeds from principal business dispositions ....................... 2,608 (605) 176 Change in investment in and advances to affiliates .................. (6,635) 1,750 6,193 All other investing activities ...................................... 298 (4,139) (4,687) ------------- ------------- --------------- Cash used for investing activities ............................... (21,332) (10,837) (14,391) ------------- ------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in borrowings (maturities of 90 days or less) ............ 30,834 (576) (2,591) Newly issued debt - short-term (91-365 days) ....................................... 5,124 7,601 14,081 - long-term senior ............................................... 14,437 28,780 25,016 Proceeds - non-recourse, leveraged lease debt ....................... 1,008 1,139 816 Repayments and other reductions - short-term ..................................................... (23,810) (27,382) (17,291) - long-term senior ............................................... (4,957) (2,672) (97) Principal payments - non-recourse, leveraged lease debt ............. (144) (94) (126) Dividends paid ...................................................... (2,042) (1,612) (1,537) Contributions from GE Capital Services .............................. 2,649 895 - Preferred stock issued in excess of par ............................. - - 300 ------------- ------------- --------------- Cash from financing activities ................................... 23,099 6,079 18,571 ------------- ------------- --------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING THE YEAR .......... 719 (2,658) 2,643 CASH AND EQUIVALENTS AT BEGINNING OF YEAR ........................... - 2,658 15 ------------- ------------- --------------- CASH AND EQUIVALENTS AT END OF YEAR ................................. $ 719 $ - $ 2,658 ============= ============= ===============
See notes to Condensed Financial Statements. 60
GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (Concluded) GENERAL ELECTRIC CAPITAL CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS Borrowings Total long-term borrowings at December 31, 2001 and 2000, are shown below. 2001 2000 ---------------------------------------- ------------------ (In millions) Maturities Amount Average rate (a) Amount --------------- ----------------- ---------------------- ------------------ Senior notes .......................... 2003-2055 $ 60,535 5.38% $ 69,006 Subordinated notes (c) ................ 2006-2012 698 8.04 698 ----------------- ------------------ 61,233 69,704 Foreign currency loss (b).............. (866) - ----------------- ------------------ $ 60,367 $ 69,704 ================= ==================
(a) Based on year-end balances and year-end local currency interest rates, including the effects of related interest rate and currency swaps, if any, directly associated with the original debt issuance. (b) Borrowings in 2001 exclude the foreign exchange effects of related currency swaps in accordance with the provisions of SFAS 133. (c) At year-end 2001 and 2000, $698 million of subordinated notes were guaranteed by GE. At December 31, 2001, maturities of long-term borrowings during the next five years, including the current portion of long-term debt, are $24,136 million in 2002, $20,608 million in 2003, $11,652 million in 2004, $6,629 million in 2005, and $4,447 million in 2006. Interest rate risk is managed by GE Capital in light of the anticipated behavior, including prepayment behavior, of assets in which debt proceeds are invested. A variety of instruments, including interest rate and currency swaps and currency forwards, are employed to achieve management's interest rate objectives. Effective interest rates are lower under these "synthetic" positions than could have been achieved by issuing debt directly. At December 31, 2001 interest rate swap maturities ranged from 2002 to 2048, and average interest rates for fixed-rate borrowings (including "synthetic" fixed-rate borrowings) were 5.94% (6.24% at year-end 2000). Interest expense on the Condensed Statement of Current and Retained Earnings is net of interest income on loans and advances to majority owned affiliates of $1,585 million, $1,610 million and $1,129 million for 2001, 2000 and 1999, respectively. Income Taxes General Electric Company files a consolidated U.S. federal income tax return which includes GE Capital. Income tax benefit includes the effect of GE Capital on the consolidated return. 61 Exhibit 4 (h) March 7, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Subject: General Electric Capital Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2001 - File No. 1-6461 Dear Sirs: Neither General Electric Capital Corporation (the "Corporation") nor any of its subsidiaries has outstanding any instrument with respect to its long-term debt that is not registered or filed with the Commission and under which the total amount of securities authorized exceeds 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. In accordance with paragraph (b) (4) (iii) of Item 601 of Regulation S-K (17 CFR ss.229.601),the Corporation hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each instrument which defines the rights of holders of such long-term debt. Very truly yours, GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ J.A. Parke ------------------------- J.A. Parke, Vice Chairman and Chief Financial Officer 62
Exhibit 12 (a) GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES Computation of Ratio of Earnings to Fixed Charges Years ended December 31 ----------------------------------------------------------------- (In millions) 2001 2000 1999 1998 1997 ------------- ------------ ------------- ------------ ----------- Net earnings ....................................$ 5,902 $ 4,289 $ 4,208 $ 3,374 $ 2,729 Provision for income taxes ...................... 1,734 1,555 1,553 1,185 997 Minority interest ............................... 84 86 68 49 40 ------------- ------------ ------------- ------------ ----------- Earnings before income taxes and minority interest ....................................... 7,720 5,930 5,829 4,608 3,766 ------------- ------------ ------------- ------------ ----------- Fixed charges: Interest ....................................... 10,261 10,763 9,183 8,772 7,440 One-third of rentals ........................... 324 381 345 289 240 ------------- ------------ ------------- ------------ ----------- Total fixed charges ............................. 10,585 11,144 9,528 9,061 7,680 ------------- ------------ ------------- ------------ ----------- Less interest capitalized, net of amortization .. (88) (121) (87) (88) (52) ------------- ------------ ------------- ------------ ----------- Earnings before income taxes and minority interest plus fixed charges ....................$ 18,217 $ 16,953 $ 15,270 $ 13,581 $ 11,394 ============= ============ ============= ============ =========== Ratio of earnings to fixed charges .............. 1.72 1.52 1.60 1.50 1.48 ============= ============ ============= ============ ===========
63
Exhibit 12 (b) GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Years ended December 31 ----------------------------------------------------------------- (In millions) 2001 2000 1999 1998 1997 ------------ ----------- ------------ ------------ ----------- Net earnings .................................... $ 5,902 $ 4,289 $ 4,208 $ 3,374 $ 2,729 Provision for income taxes ...................... 1,734 1,555 1,553 1,185 997 Minority interest ............................... 84 86 68 49 40 ------------ ----------- ------------ ------------ ----------- Earnings before income taxes and minority interest ....................................... 7,720 5,930 5,829 4,608 3,766 ------------ ----------- ------------ ------------ ----------- Fixed charges: Interest ...................................... 10,261 10,763 9,183 8,772 7,440 One-third of rentals .......................... 324 381 345 289 240 ------------ ----------- ------------ ------------ ----------- Total fixed charges ............................. 10,585 11,144 9,528 9,061 7,680 Less interest capitalized, net of amortization .. (88) (121) (87) (88) (52) ------------ ----------- ------------ ------------ ----------- Earnings before income taxes and minority interest plus fixed charges .................... $ 18,217 $ 16,953 $ 15,270 $ 13,581 $ 11,394 ============ =========== ============ ============ =========== Preferred stock dividend requirements ........... $ 80 $ 126 $ 115 $ 97 $ 78 Ratio of earnings before provision for income taxes to net earnings .......................... 1.29 1.36 1.37 1.35 1.37 ------------ ----------- ------------ ------------ ----------- Preferred stock dividend factor on pre-tax basis 103 171 157 131 107 Fixed charges ................................... 10,585 11,144 9,528 9,061 7,680 ------------ ----------- ------------ ------------ ----------- Total fixed charges and preferred stock dividend requirements ................................... $ 10,688 $ 11,315 $ 9,685 $ 9,192 $ 7,787 ============ =========== ============ ============ =========== Ratio of earnings to combined fixed charges and preferred stock dividends ...................... 1.70 1.50 1.58 1.48 1.46 ============ =========== ============ ============ ===========
64 Exhibit 23 (ii) To the Board of Directors General Electric Capital Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 33-43420, 333-22265, 333-59977, and 333-66560) on Form S-3 of General Electric Capital Corporation, and in the Registration Statement (No. 33-39596) on Form S-3 jointly filed by General Electric Capital Corporation and General Electric Company, of our report dated February 8, 2002, relating to the statement of financial position of General Electric Capital Corporation and consolidated affiliates as of December 31, 2001 and 2000, and the related statements of earnings, changes in share owners' equity and cash flows for each of the years in the three-year period ended December 31, 2001, and the related schedule, which report appears in the December 31, 2001 annual report on Form 10-K of General Electric Capital Corporation. /s/ KPMG LLP Stamford, Connecticut March 8, 2002 65 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being directors and/or officers of General Electric Capital Corporation, a Delaware corporation (the "Corporation"), hereby constitutes and appoints Denis J. Nayden, James A. Parke, Joan C. Amble and Nancy E. Barton, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead in any and all capacities, to sign one or more Annual Reports for the Corporation's fiscal year ended December 31, 2001, on Form 10-K under the Securities Exchange Act of 1934, as amended, or such other form as such attorney-in-fact may deem necessary or desirable, any amendments thereto, and all additional amendments thereto in such form as they or any one of them may approve, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done to the end that such Annual Report or Annual Reports shall comply with the Securities Exchange Act of 1934, as amended, and the applicable Rules and Regulations of the Securities and Exchange Commission adopted or issued pursuant thereto, as fully and to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his substitute or resubstitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand this 7th day of March 2002. /s/ Denis J. Nayden /s/ James A. Parke - ----------------------------- ------------------------------ Denis J. Nayden, James A. Parke, Chairman of the Board and Director, Vice Chairman and Chief Executive Officer Chief Financial Officer (Principal Executive Officer) (Principal Financial Officer) /s/ Joan C. Amble ----------------------------- Joan C. Amble, Vice President and Controller (Principal Accounting Officer) (Page 1 of 2) 66 /s/ Nancy E. Barton /s/ Denis J. Nayden - ------------------------------------- ---------------------------------- Nancy E. Barton, Denis J. Nayden, Director Director /s/ James R. Bunt /s/ Michael A. Neal - ------------------------------------- ---------------------------------- James R. Bunt, Michael A. Neal, Director Director /s/ James A. Parke - ------------------------------------- ---------------------------------- David L. Calhoun, James A. Parke, Director Director /s/ Dennis D. Dammerman /s/ Ronald R. Pressman - ------------------------------------- ---------------------------------- Dennis D. Dammerman, Ronald R. Pressman, Director Director /s/ Gary M. Reiner - ------------------------------------- ---------------------------------- Scott C. Donnelly, Gary M. Reiner, Director Director /s/ Michael D. Fraizer /s/ Gary L. Rogers - ------------------------------------- ---------------------------------- Michael D. Fraizer, Gary L. Rogers, Director Director /s/ Arthur H. Harper /s/ John M. Samuels - ------------------------------------- ---------------------------------- Arthur H. Harper, John M. Samuels, Director Director /s/ Keith S. Sherin - ------------------------------------- ---------------------------------- Benjamin W. Heineman, Jr., Keith S. Sherin, Director Director /s/ Jeffrey R. Immelt /s/ Edward D. Stewart - ------------------------------------- ---------------------------------- Jeffrey R. Immelt, Edward D. Stewart, Director Director /s/ Robert Jeffe /s/ Robert C. Wright - ------------------------------------- ---------------------------------- Robert Jeffe, Robert C. Wright, Director Director - ------------------------------------- John H. Myers, Director A MAJORITY OF THE BOARD OF DIRECTORS (Page 2 of 2) 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENERAL ELECTRIC CAPITAL CORPORATION March 7, 2002 By: /s/ Denis J. Nayden -------------------------------- (Denis J. Nayden) Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date /s/ Denis J. Nayden Chairman of the Board and March 7, 2002 - --------------------------- Chief Executive Officer (Denis J. Nayden) (Principal Executive Officer) /s/ James A. Parke Vice Chairman March 7, 2002 - --------------------------- and Chief Financial Officer (James A. Parke) (Principal Financial Officer) /s/ Joan C. Amble Vice President and Controller March 7, 2002 - --------------------------- (Principal Accounting Officer) (Joan C. Amble) NANCY E. BARTON* Director JAMES R. BUNT* Director DENNIS D. DAMMERMAN* Director MICHAEL D. FRAIZER* Director ARTHUR H. HARPER* Director JEFFREY R. IMMELT* Director ROBERT JEFFE* Director DENIS J. NAYDEN* Director MICHAEL A. NEAL* Director JAMES A. PARKE* Director RONALD R. PRESSMAN* Director GARY M. REINER* Director GARY L. ROGERS* Director JOHN M. SAMUELS* Director KEITH S. SHERIN* Director EDWARD D. STEWART* Director ROBERT C. WRIGHT* Director A MAJORITY OF THE BOARD OF DIRECTORS *By: /s/ Joan C. Amble March 7, 2002 --------------------------- (Joan C. Amble) Attorney-in-fact EX-2 3 gecc2001ex2a.txt CERTIFICATE OF MERGER OF GENERAL ELECTRIC CAPITAL CORPORATION WITH AND INTO GECS MERGER SUB, INC. (UNDER SECTION 252 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE) Each of the undersigned corporations, in connection with the merger of General Electric Capital Corporation, a New York corporation, with and into GECS Merger Sub, Inc., a Delaware corporation (the "Merger"), does hereby certify: FIRST: That the name and state of incorporation of each of the constituent corporations in the Merger are as follows: Name State of Incorporation ---- ---------------------- General Electric Capital Corporation New York GECS Merger Sub, Inc. Delaware SECOND: That the Agreement and Plan of Merger between General Electric Capital Corporation and GECS Merger Sub, Inc., dated June 25, 2001, has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of Section 252 (and, with respect to GECS Merger Sub, Inc., by the written consent of its sole stockholder in accordance with Section 228) of the General Corporation Law of the State of Delaware. THIRD: That the surviving corporation in the Merger is GECS Merger Sub, Inc., a Delaware corporation (the "Surviving Corporation"). The name of the Surviving Corporation shall be amended in the Merger to be "General Electric Capital Corporation." FOURTH: The Certificate of Incorporation of GECS Merger Sub, Inc., as in effect immediately prior to the effective time of the Merger, shall continue in full force and effect as the Certificate of Incorporation of the Surviving Corporation, except that Article First shall be amended in its entirety to read "Article First: The name by which the corporation is to be known is General Electric Capital Corporation." FIFTH: That the executed Agreement and Plan of Merger is on file at the principal place of business of the Surviving Corporation located at 260 Long Ridge Road, Stamford, Connecticut 06927. SIXTH: That a copy of the Agreement and Plan of Merger will be furnished by the Surviving Corporation, on request and without cost, to any stockholder of any constituent corporation. SEVENTH: That immediately prior to the Merger, General Electric Capital Corporation (a New York corporation) had authorized (a) 3,866,000 shares of common stock, with a par value of $200.00 per share, (b) 750,000 shares of preferred stock, with a par value of $0.01 per share and (c) 33,000 shares of variable cumulative preferred stock, with a par value of $100.00 per share, with such variable cumulative preferred stock designated in the following series: 725 shares of series A, 725 shares of series B, 725 shares of series C, 725 shares of series D, 700 shares of series E, 700 shares of series F, 700 shares of series G, 500 shares of series H, 500 shares of series I, 500 shares of series J, 500 shares of series K, 500 shares of series L, 500 shares of series M, 750 shares of series N, 500 shares of series O, 750 shares of series P, 500 shares of series Q, 700 shares of series R, 650 shares of series S, 650 shares of series T, 500 shares of series U, 500 shares of series V, 500 shares of series W, 750 shares of series X, 750 shares of series X-1, 750 shares of series Y, 750 shares of series Y-1, 1,000 shares of series Z, 500 shares of series AA, 500 shares of series BB, 500 shares of series CC, 500 shares of series DD, 500 shares of series EE, 500 shares of series FF, 650 shares of series GG, 650 shares of series HH, 700 shares of series II, 1,000 shares of series JJ, 1,000 shares of series KK and 1,000 shares of series LL. EIGHTH: That the Merger shall be effective at 10:00 a.m. (Eastern Daylight time) on July 2, 2001. [signature page follows] 2 IN WITNESS WHEREOF, GECS Merger Sub, Inc., the Surviving Corporation, has caused this Certificate of Merger to be executed on this 29 day of June, 2001, by Nancy E. Barton, its authorized officer and General Electric Capital Corporation has caused this Certificate of Merger to be executed on this 29 day of June, 2001, by James A. Parke, its authorized officer. GECS Merger Sub, Inc. By /s/ Nancy E. Barton ---------------------------------- Nancy E. Barton Senior Vice President General Electric Capital Corporation By /s/ James A. Parke ---------------------------------- James A. Parke Vice Chairman and Chief Financial Officer RESTATED CERTIFICATE OF INCORPORATION OF GENERAL ELECTRIC CAPITAL CORPORATION The present name of the corporation is General Electric Capital Corporation. The corporation was incorporated under the name "GECS Merger Sub, Inc." by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on February 14, 2000. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the corporation's Certificate of Incorporation and there is no discrepancy between the provisions of the corporation's Certificate of Incorporation as theretofore amended and supplemented and the provisions of this Restated Certificate of Incorporation. This Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware. The Certificate of Incorporation of the corporation is hereby restated to read in its entirety as follows: ARTICLE FIRST: The name by which the corporation is to be known is General Electric Capital Corporation. ARTICLE SECOND: The address of the corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware. The name of its registered agent at such address is the Corporation Trust Company. ARTICLE THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE FOURTH: The total number of shares of stock which the corporation shall have authority to issue is 4,649,000 of which (a) 3,866,000 shall be common stock, par value $.01 per share (the "Common Stock"), (b) 33,000 shall be variable cumulative preferred stock, par value $100.00 per share (the "Variable Cumulative Preferred Stock") and (c) 750,000 shares shall be preferred stock, par value $.01 per share (the "Preferred Stock"). The designations, preferences, privileges, rights and voting powers and any limitations, restrictions or qualifications thereof, of the shares of each class are as follows: (a) The holders of the Common Stock shall have the right to vote on all questions to the exclusion of all other stockholders, except as may be provided in this Certificate of Incorporation, in a Preferred Stock Designation (as hereinafter defined), in a Variable Cumulative Preferred Stock Designation (as hereinafter defined) or as required by law. (b) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors (or any committee to which it may duly delegate the authority granted in this -1- paragraph) is hereby empowered to authorize the issuance from time to time of shares of Preferred Stock in one or more series, and by filing a certificate pursuant to applicable law of the State of Delaware (hereinafter referred to as a "Preferred Stock Designation") to establish from time to time for each such series the number of shares to be included in each such series and to fix the designations, powers, rights and preferences of the shares of each such series, and the qualifications, limitations and restrictions thereof, including, without limitation, dividend rights, dissolution rights, conversion rights, exchange rights and redemption rights thereof, as shall be stated and expressed in a resolution or resolutions adopted by the Board of Directors (or such committee thereof) providing for the issuance of such series of Preferred Stock. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, determination of the following: (1) The designation of the series, which may be by distinguishing number, letter or title. (2) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding). (3) The amounts payable on, and the preferences, if any, of shares of the series in respect of dividends, and whether such dividends, if any, shall be cumulative or noncumulative. (4) Dates at which dividends, if any, shall be payable. (5) The redemption rights and price or prices, if any, for shares of the series. (6) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series. (7) The amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation. (8) Whether the shares of the series shall be convertible into or exchangeable for shares of any other class or series, or any other security, of the corporation or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made. -2- (9) Restrictions on the issuance of shares of the same series or of any other class or series. (10) The voting rights, if any, of the holders of shares of the series. (c) Subject to the series of Variable Cumulative Preferred Stock created by Sections Thirteen through Twenty-Five of this subparagraph (c), such series having the rights, preferences and limitations as are set forth in Sections One through Twenty-Eight of this subparagraph (c), the Variable Cumulative Preferred Stock may be issued from time to time in one or more series. The Board of Directors (or any committee to which it may duly delegate the authority granted in this paragraph) is hereby empowered to authorize the issuance from time to time of shares of the Variable Cumulative Preferred Stock in one or more series and by filing a certificate pursuant to applicable law of the State of Delaware (hereinafter referred to as "Variable Cumulative Preferred Stock Designation") to establish from time to time for each such series the number of shares to be included in each such series and to fix the designations, powers, rights and preferences of the shares of each such series, and the qualifications, limitations and restrictions thereof, including, without limitation, dividend rights, dissolution rights, conversion rights, exchange rights, and redemption rights thereof, as shall be stated and expressed in a resolution or resolutions adopted by the Board of Directors (or such committee thereof) providing for the issuance of such series of Variable Cumulative Preferred Stock. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (1) The designation of the series, which may be by distinguishing number, letter or title. (2) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Variable Cumulative Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding). (3) The amounts payable on, and the preferences, if any, of shares of the series in respect of dividends, and whether such dividends, if any, shall be cumulative or noncumulative. (4) Dates at which dividends, if any, shall be payable. (5) The redemption rights and price or prices, if any, for shares of the series. (6) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series. -3- (7) The amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation. (8) Whether the shares of the series shall be convertible into or exchangeable for shares of any other class or series, or any other security, of the corporation or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made. (9) Restrictions on the issuance of shares of the same series or of any other class or series. (10) The voting rights, if any, of the holders of shares of the series. Except as otherwise set forth in such resolution or resolutions, each such series of Variable Cumulative Preferred Stock shall have all such designations, rights, preferences and privileges, and any limitations, restrictions or qualifications thereof as are set forth in the following Sections One through Twelve of this subparagraph (c): SECTION ONE. Definitions. ----------- As used in this subparagraph (c) of this Article Fourth, the following terms shall have the following meanings, unless the context otherwise requires: 1. "Affiliate" shall mean any Person known to the Trust Company to be controlled by, in control of, or under common control with, the corporation. 2. "Agent Member" shall mean the member of the Auction Stock Depository that will act on behalf of a Bidder and is identified as such in such Bidder's Master Purchaser's Letter. 3. "Applicable Determining Rate" shall mean with respect to a Dividend Period from one (1) day to five (5) days, the greater of the Effective Composite Commercial Paper Rate for a period of five (5) days and the Federal Funds Rate; with respect to a Dividend Period of six (6) days to eighty-nine (89) days, the Effective Composite Commercial Paper Rate; with respect to a Dividend Period of ninety (90) days to three hundred sixty-four (364) days, the Effective LIBOR Rate; with respect to a Dividend Period of two (2) years to ten (10) years, the U.S. Treasury Note Rate; and with respect to a Dividend Period in excess of ten (10) years, the U.S. Treasury Bond Rate. -4- 4. "Auction" shall mean the periodic implementation of the Auction Procedures. 5. "Auction Date" shall mean the Business Day immediately preceding the first day of a Dividend Period for Auction Stock. 6. "Auction Method" shall mean the method of determining Dividend Periods and Dividend Rates for the shares of Variable Cumulative Preferred Stock described in Subsection D of Section Four. 7. "Auction Procedures" shall mean the procedures for conducting Auctions set forth in Section Five hereof. 8. "Auction Stock" shall mean the shares of Variable Cumulative Preferred Stock for which the Dividend Period and Dividend Rate are determined pursuant to the Auction Method. 9. "Auction Stock Depository" shall mean The Depository Trust Company and its successors or any other securities depository selected by the corporation which agrees to follow the procedures required to be followed by such securities depository in connection with shares of Auction Stock. 10. "Available Auction Stock" shall have the meaning specified in Subsection (C)(1)(a) of Section Five hereof. 11. "Bid" and "Bids" shall have the respective meanings specified in Subsection (A)(1)(b) of Section Five hereof. 12. "Bidder" and "Bidders" shall have the respective meanings specified in Subsection (A)(1)(b) of Section Five hereof. 13. "Board of Directors" shall mean the Board of Directors of the corporation. 14. "Broker-Dealer" shall mean any broker-dealer, or other entity permitted by law to perform the function required of a Broker-Dealer in the Auction Procedures, that is a member of, or a participant in, the Auction Stock Depository, and that has been selected by the corporation and has entered into a Broker-Dealer Agreement with the Trust Company that remains effective. 15. "Broker-Dealer Agreement" shall mean an agreement between the Trust Company and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the Auction Procedures. 16. "Business Day" shall mean a day on which the New York Stock Exchange, Inc., is open for trading and which is neither a Saturday, Sunday nor other day on which banks in The City of New York, New York, are authorized by law to close. -5- 17. "Converted Remarketed Stock" shall mean shares of Variable Cumulative Preferred Stock which, by reason of an election by the corporation of a different Dividend Determination Method, will become Auction Stock at the end of the then-current Dividend Period applicable thereto. 18. "Date of Original Issue" shall mean, as to any share of Variable Cumulative Preferred Stock, the date on which the corporation initially issues such share. 19. "Dividend Determination Method" or "Method" shall mean either the Auction Method or the Remarketing Method. 20. "Dividend Payment Date" shall mean, with respect to each share of Variable Cumulative Preferred Stock, the last day of each Dividend Period applicable thereto, regardless of its length, and, in addition, (i) in the case of Dividend Periods of more than ninety-nine (99) days, on the following additional dates: (a) if such Dividend Period is from one hundred (100) to one hundred ninety (190) days, on the ninety-first (91st) day; (b) if such Dividend Period is from one hundred ninety-one (191) to two hundred eighty-one (281) days, on the ninety-first (91st) and one hundred eighty-second (182nd) days; (c) if such Dividend Period is from two hundred eighty-two (282) to three hundred sixty-four (364) days, on the ninety-first (91st), one hundred eighty-second (182nd) and two hundred seventy-third (273rd) days; and (d) if such Dividend Period is from two (2) to thirty (30) years, on January 15, April 15, July 15 and October 15 of each year, provided, that in all such cases, if such date is not a Business Day, the Dividend Payment Date shall be the Business Day next succeeding such date. However, so long as the Auction Stock Depository shall make payments to participants and members in next-day funds, if a day that otherwise would be a Dividend Payment Date for shares of Auction Stock is succeeded by a day which is not a Business Day then the Dividend Payment Date will be the next succeeding Business Day that is immediately succeeded by a Business Day. 21. "Dividend Period" and "Dividend Periods" shall mean, as to each share of Variable Cumulative Preferred Stock, each period with respect to which dividends on such share shall accumulate and be payable, each such dividend period to be determined pursuant to Section Four. 22. "Dividend Rate" shall mean, as to each share of Variable Cumulative Preferred Stock, each rate at which a dividend shall be payable on such share, such dividend rate to be determined pursuant to Section Four. 23. "Effective Composite Commercial Paper Rate" shall mean, on any date, (i) the Money Market Yield of the rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's or "Aa" by Moody's or the equivalent of such rating by another nationally recognized rating agency, for a maturity that equals the duration of the relevant Dividend Period as such rate is made available on a discount basis or otherwise by the Federal Reserve Bank -6- of New York on such date, or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate by 2:00 P.M., New York City time, on such date, the Money Market Yield of the arithmetic mean of the rates on commercial paper of such maturity placed on behalf of such issuers, as quoted on a discount basis or otherwise by Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co., and Shearson Lehman Commercial Paper Incorporated, or, in lieu of any thereof, their respective affiliates or successors that are commercial paper dealers (the "Commercial Paper Dealers"), to the Trust Company or the Remarketing Agent, as the case may be, for the close of business on the Business Day immediately preceding such date. In the event that the Federal Reserve Bank of New York does not make available such a rate and if any Commercial Paper Dealer does not quote a rate required to determine the Effective Composite Commercial Paper Rate, the Effective Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the corporation to provide such rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if the corporation does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. "Substitute Commercial Paper Dealers" shall mean The First Boston Corporation or Morgan Stanley & Co. Incorporated or, in lieu of either thereof, their respective affiliates or successors that are commercial paper dealers. In the event that no quoted rates are available for a maturity that equals the duration of the relevant Dividend Period, then the rate will be the higher of the quoted rates for the maturity immediately shorter or immediately longer than the duration of the relevant Dividend Period. 24. "Effective LIBOR Rate" shall mean, on any date, the offered rates for deposits in dollars for a period of the same duration as the relevant Dividend Period, which appear on the Reuters Screen LIBO Page as of 11:00 A.M., London time, on such date. If at least two such offered rates appear on the Reuters Screen LIBO Page, the Effective LIBOR Rate in respect of such date will be the arithmetic mean of such offered rates. If fewer than two offered rates appear, the Effective LIBOR Rate in respect of such date will be determined on the basis of the rates quoted to the Trust Company or the Remarketing Agent, as the case may be, at which deposits in dollars are offered by the Reference Banks (as hereinafter defined) at approximately 11:00 A.M., London time, on the day that is the Business Day preceding such date to prime banks in the London interbank market for a period of the same duration as the relevant Dividend Period. The corporation shall request the principal London office of each of the Reference Banks to provide a quotation of such rate to the Trust Company or the Remarketing Agent, as the case may be. If at least two such quotations are provided, the Effective LIBOR Rate in respect of such date will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the Effective LIBOR Rate in respect of such date will be the arithmetic mean of the rates quoted to the Trust Company or Remarketing Agent, as the case may be, by major banks in New York City, selected by the corporation, at approximately 11:00 A.M., New York City time, on such date for loans in dollars to leading European banks for a period of the same duration as the relevant Dividend Period. "Reference Banks" means four major banks in the London market, selected by the corporation. In -7- the event that no quoted rates are available for a maturity that equals the duration of the relevant Dividend Period, then the rate will be the higher of the quoted rates for the maturity immediately shorter or immediately longer than the duration of the relevant Dividend Period. 25. "Existing Holder" shall mean, when used with respect to shares of Auction Stock, a Person who has signed a Master Purchaser's Letter and is listed as the beneficial owner of such shares of Auction Stock in the records of the Trust Company and will in all events include Holders of Converted Remarketed Stock. 26. "Federal Funds Rate" shall mean, on any date, (i) the overnight Federal funds rate as such rate is made available by the Federal Reserve Bank of New York or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate by 2:00 P.M., New York City time, on any day, then the arithmetic mean of the rates for each of the last transaction in overnight Federal funds arranged by three leading brokers of Federal funds transactions in New York City as selected by the corporation prior to 9:00 A.M., New York City time, on that day. 27. "Hold Order" and "Hold Orders" shall have the respective meanings specified in Subsection (A)(1)(b), of Section Five hereof. 28. "Holder" shall mean the holder of record of shares of Variable Cumulative Preferred Stock, as the same appears on the record of stockholders of the corporation. 29. "Initial Dividend Period" shall have the meaning specified in Subsection B of Section Four hereof. 30. "Junior Stock" shall mean all stock of the corporation now or hereafter authorized, except (i) Variable Cumulative Preferred Stock, (ii) Preferred Stock and (iii) any future class of stock ranking prior to or on a parity with Variable Cumulative Preferred Stock as to dividends or assets. 31. "Master Purchaser's Letter" shall mean a letter addressed to the corporation, the Trust Company and an Agent Member in which a Person agrees that if such Person should offer to purchase, purchase, offer to sell and/or sell shares of a series of the Variable Cumulative Preferred Stock, such Person will be bound by the Auction Procedures. 32. "Maximum Rate" shall mean, on any date with respect to any share of Variable Cumulative Preferred Stock, a percentage (determined as set forth below based on the prevailing rating of such share of Variable Cumulative Preferred Stock in effect at the close of business on the Business Day immediately preceding such date and on the duration of the relevant Dividend Period) of the Applicable Determining Rate for such share on such date, provided, that during the continuance of a Payment Failure the applicable percentage shall be 200%: -8- Percentage ---------- For Dividend For Dividend Periods of Less Periods of Two Prevailing Rating Than One Year Years or More ----------------- ------------- ------------- AA/"aa" or above 110% 125% A/"a" 125% 140% BBB/"baa" 150% 175% Below BBB/"baa" 200% 225% For purposes of this definition, the "prevailing rating" of such series shall be (i) AA/"aa" or above, if such series has a rating of AA- or better by Standard & Poor's and "aa3" or better by Moody's, or the equivalent of both of such ratings by a substitute rating agency or agencies selected as provided below, (ii) if not AA/"aa" or above, then A/"a" if such series has a rating of A- or better by Standard & Poor's and "a3" or better by Moody's or the equivalent of both of such ratings by a substitute rating agency or agencies selected as provided below, (iii) if not AA/"aa" or above or A/"a", then BBB/"baa" if such series has a rating of BBB- or better by Standard & Poor's and "baa3" or better by Moody's or the equivalent of both of such ratings by a substitute rating agency or agencies selected as provided below, and (iv) if not AA/"aa" or above, A/"a" or BBB/"baa", then below BBB/"baa". The corporation will take all reasonable action necessary to enable Standard & Poor's and Moody's to provide a rating for the Variable Cumulative Preferred Stock of each series. If neither Standard & Poor's nor Moody's makes such a rating available, the corporation or its duly authorized agent will select one or two nationally recognized securities rating agencies to act as a substitute rating agency or agencies, as the case may be. 33. "Money Market Yield" shall mean, with respect to any rate which is quoted on a bank discount basis, a yield (expressed as a percentage) calculated in accordance with the following formula: Money Market Yield D x 360 x 100 ------------------ 360 - (D x M) where "D" refers to the per annum rate, quoted on a bank discount basis and expressed as a decimal; and "M" refers to the number of days for which such bank discount rate is quoted. 34. "Moody's" shall mean Moody's Investors Service, Inc. and its successors. 35. "Order" and "Orders" shall have the respective meanings specified in Subsection (A)(1)(b) of Section Five hereof. -9- 36. "Outstanding" shall mean, as of any date, shares of a series theretofore issued by the corporation except (i) any shares of such series theretofore canceled or delivered for cancellation or redeemed, repurchased or otherwise acquired by the corporation, or as to which a notice of redemption shall have been given by the corporation, (ii) any shares of such series as to which the corporation or any Affiliate thereof shall be an owner (except that any shares acquired by an Affiliate which is a broker-dealer and which acquired such shares in the normal course of its business shall be deemed to be Outstanding), or (iii) any shares of such series represented by any certificate in lieu of which a new certificate has been executed and delivered by the corporation. 37. "Paying Agent" shall mean a bank or trust company duly appointed as such. 38. "Payment Failure" shall mean that the corporation shall fail to pay: (i) all dividends in respect of any share of Variable Cumulative Preferred Stock which have accumulated during any Dividend Period applicable to such share by no later than the third Business Day following the last day of such Dividend Period or (ii) the redemption price in respect of shares of Variable Cumulative Preferred Stock called for redemption on the date when due if, in each such case, such failure shall continue unremedied. 39. "Person" shall mean and include an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. 40. "Potential Holder" shall mean any Person, including any Existing Holder, (i) who shall have executed a Master Purchaser's Letter and (ii) who may be interested in acquiring shares of Subject Auction Stock (or, in the case of an Existing Holder, additional shares of Subject Auction Stock of such series). 41. "Remarketed Stock" shall mean the shares of Variable Cumulative Preferred Stock for which the Dividend Rate and Dividend Period are determined pursuant to the Remarketing Method. 42. "Remarketing Agent" shall mean, at any time for any share of Remarketed Stock, the entity or entities appointed by the corporation to act on its behalf in establishing Dividend Rates and Dividend Periods for such share and to act on behalf of Holders in remarketing such share as provided in the Remarketing Procedures. 43. "Remarketing Depository" shall mean any depository selected by the corporation which agrees to follow the procedures required to be followed by such depository in connection with the shares of Remarketed Stock. -10- 44. "Remarketing Method" shall mean the method of determining Dividend Periods and Dividend Rates for the shares of Variable Cumulative Preferred Stock described in Subsection E of Section Four hereof. 45. "Remarketing Procedures" shall mean the procedures for determining Dividend Rates and Dividend Periods for Remarketed Stock set forth in Section Six hereof. 46. "Sell Order" and "Sell Orders" shall have the respective meanings specified in Subsection (A)(1)(b) of Section Five hereof. 47. "Standard & Poor's" shall mean Standard & Poor's Corporation and its successors. 48. "Subject Auction Stock" shall mean, with respect to any Auction Date, the shares of Auction Stock subject to Auction on such date. 49. "Submission Deadline" shall mean 1:00 P.M., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Trust Company as specified by the Trust Company from time to time. 50. "Submitted Bid" and "Submitted Bids" shall have the respective meanings specified in Subsection (C)(1) of Section Five hereof. 51. "Submitted Hold Order" and "Submitted Hold Orders" shall have the respective meanings specified in Subsection (C)(1) of Section Five hereof. 52. "Submitted Order" and "Submitted Orders" shall have the respective meanings specified in Subsection (C)(1) of Section Five hereof. 53. "Submitted Sell Order" and "Submitted Sell Orders" shall have the respective meanings specified in Subsection (C)(1) of Section Five hereof. 54. "Subsequent Dividend Period" and "Subsequent Dividend Periods" shall mean, for each share of Variable Cumulative Preferred Stock, each Dividend Period applicable thereto other than the Initial Dividend Period applicable thereto. 55. "Sufficient Clearing Bids" shall have the meaning specified in Subsection (C)(1)(b) of Section Five hereof. 56. "Trust Company" shall mean a bank or trust company duly appointed as such. 57. "U.S. Treasury Bond Rate" shall mean, on any date, (i) the yield as calculated by reference to the bid price quotation of the actively traded, current coupon Treasury Bond with a -11- remaining maturity most nearly comparable to 30 years from such date, as such bid price quotation is published on the Business Day immediately preceding such date by the Federal Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report for such Business Day, or (ii) if such yield as so calculated is not available, the Alternate Treasury Bond Rate on such date. "Alternate Treasury Bond Rate" on any date means the yield as calculated by reference to the arithmetic average of the bid price quotations of the actively traded, current coupon Treasury Bond with a remaining maturity most nearly comparable to 30 years from such date, as determined by bid price quotations as of any time on the Business Day immediately preceding such date, obtained by the Trust Company or the Remarketing Agent, as the case may be, from at least three recognized primary U.S. Government securities dealers selected by the corporation. 58. "U.S. Treasury Note Rate" shall mean, on any date, (i) the yield as calculated by reference to the bid price quotation of the actively traded, current coupon Treasury Note with a maturity most nearly comparable to the length of the related Dividend Period, as such bid price quotation is published on the Business Day immediately preceding such date by the Federal Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report for such Business Day, or (ii) if such yield as so calculated is not available, the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on any date means the yield as calculated by reference to the arithmetic average of the bid price quotations of the actively traded, current coupon Treasury Note with a maturity most nearly comparable to the length of the related Dividend Period, as determined by bid price quotations as of any time on the Business Day immediately preceding such date, obtained by the Trust Company or the Tender Agent, as the case may be, from at least three recognized primary U.S. Government securities dealers selected by the corporation. 59. "Winning Bid Rate" shall have the meaning specified in Subsection (C)(1)(c) of Section Five hereof. SECTION TWO. Parity. ------ All shares of all series of Variable Cumulative Preferred Stock, and all shares of all series of Preferred Stock, shall rank equally with respect to payments of dividends and distributions upon liquidation. SECTION THREE. Authorized Shares in Series. --------------------------- Each series of Variable Cumulative Preferred Stock shall consist of such number of shares as shall be set forth in this Certificate of Incorporation or as shall be fixed in the resolution of the Board of Directors (or any committee to which it may duly delegate the authority granted in this subparagraph (c)) authorizing the series. At any given time all shares of a series of Variable Cumulative Preferred Stock shall be either all Auction Stock or all Remarketed Stock. -12- SECTION FOUR. Dividends and Dividend Periods. ------------------------------ A. The Holders shall be entitled to receive, when, as and if declared by the Board of Directors of the corporation (or any committee to which it may duly delegate the authority granted in this subparagraph (c)), out of funds legally available therefor, cumulative cash preferential dividends at the rates, on the dates, for the periods and otherwise in the manner provided in this Section. Such preferential dividends shall be declared and paid or set apart for payment in full for all previous Dividend Periods before the declaration, payment or setting apart of any funds or assets for payment of any dividends on, or the making of, or the setting apart of, any funds or assets for any distribution with respect to, any class of Junior Stock, and before any purchase, redemption, or other acquisition of any class of Junior Stock, or the setting apart of any funds or assets for such purchase, redemption or acquisition. Each share of Variable Cumulative Preferred Stock shall rank on a parity with each share of Preferred Stock and with each other share of Variable Cumulative Preferred Stock, irrespective of series, with respect to the preferential dividends at the respective rates fixed for such share, and no preferential dividend shall be declared or paid or set apart for payment on any shares of Variable Cumulative Preferred Stock for any current Dividend Period if dividends on any other shares of Variable Cumulative Preferred Stock or Preferred Stock are accumulated and unpaid for any prior Dividend Period or, in case of payment of dividend arrearages on Variable Cumulative Preferred Stock or Preferred Stock, unless at the same time the corporation shall also declare or pay or set apart for payment, as the case may be, such amounts with respect to all such dividend arrearages on all Variable Cumulative Preferred Stock and Preferred Stock so that all such shares shall share ratably in such payment in accordance with the sums which would be payable on all such shares if all dividends (including all accumulations, if any) were declared and paid in full. For purposes hereof, dividend accumulations and arrearages do not include any dividends which have not yet become payable or as to which there has not occurred a Dividend Payment Date, as the case may be. B. Dividends on shares of Variable Cumulative Preferred Stock shall accumulate from the following dates: (i) with respect to any particular share of any series of Variable Cumulative Preferred Stock into which a share of Corresponding Preferred Stock (as defined below) will be converted in the Merger (as defined below), the first day of the dividend period (in effect) with respect to the Corresponding Preferred Stock during which the Merger occurs, so that all accrued but unpaid dividends (through the time of the Merger) in respect of each share of Corresponding Preferred Stock that are outstanding immediately prior to the effective time of the Merger shall be carried over and shall be deemed to be accrued but unpaid dividends (as of the time of the Merger) on the respective shares of Variable Cumulative Preferred Stock into which the Corresponding Preferred Stock is converted pursuant to the Merger and (ii) with respect to any share of any series of Variable Cumulative Preferred Stock issued after the Merger, the Date of Original Issue. Dividends shall be payable on each Dividend Payment Date with respect to each share of each series of Variable Cumulative Preferred Stock. The duration of the initial Dividend Period for each series of Variable Cumulative Preferred Stock (for each series, the "Initial Dividend Period") and the Dividend Rate for such series for such Initial Dividend Period shall be fixed in the resolution of the -13- Board of Directors (or any committee to which it may duly delegate its authority) authorizing such series, provided, that the duration of any Initial Dividend Period shall not exceed thirty (30) years. Thereafter, the determination of the duration of each Subsequent Dividend Period with respect to shares of Variable Cumulative Preferred Stock and the Dividend Rate for each such Subsequent Dividend Period shall be determined by either the Auction Method or the Remarketing Method. Subject to the limitations set forth below, either Dividend Determination Method may be selected by the corporation for any Subsequent Dividend Period with respect to all the shares of Variable Cumulative Preferred Stock of a series. The corporation shall make such selection by giving notice to Holders, sent by first class mail, postage prepaid, to the address of each such Holder appearing on the record of stockholders of the corporation not less than seven (7) days prior to the first day of such Subsequent Dividend Period. Any Dividend Determination Method so selected by the corporation for a series shall continue in effect for such series until the corporation selects the other Method in the aforesaid manner. No defect in the notice or in the mailing thereof shall affect the validity of any change in the Dividend Determination Method. Notwithstanding the foregoing, the corporation shall not be entitled to elect that a Dividend Determination Method other than the Dividend Determination Method then applicable to a series shall apply to such series if, (i) at the time of an election that the Remarketing Method apply to a series, the corporation has not appointed a Remarketing Agent, and a Remarketing Depository, (ii) at the time of an election that the Auction Method apply to a series, the corporation has not appointed a Trust Company and at least one Broker-Dealer for such series or such election would result in more than one Dividend Period for the Auction Stock of such series or (iii) a Payment Failure has occurred and is continuing. For purposes of the foregoing sentence, the Auction Method shall be deemed to be the Dividend Determination Method applicable to a series during the Initial Dividend Period therefor unless otherwise indicated by the corporation. Once the corporation shall have selected a Dividend Determination Method for a series for a Subsequent Dividend Period in the aforesaid manner, such selection shall become effective on the last day of the Dividend Period(s) then applicable to shares of such series notwithstanding any Payment Failure which may occur after the delivery of the selection notice by the corporation, the failure to remarket tendered shares of Remarketed Stock of such series, in the case of the selection of the Remarketing Method, or the lack of Sufficient Clearing Bids in the Auction for such series, in the case of the selection of the Auction Method. For purposes of this Subsection B of Section Four of Article Fourth, the following terms shall have the following meanings: (i) "Corresponding Preferred Stock"shall mean, with respect to any share of Variable Cumulative Preferred Stock, the share of the series of variable cumulative preferred stock of GECC-NY outstanding immediately prior to the effective time of the Merger that is converted into a share of Variable Cumulative Preferred Stock pursuant to the terms of the Merger Agreement. (ii) "GECC-NY" shall mean General Electric Capital Corporation, a New York banking corporation and the corporation's predecessor-in-interest. -14- (iii) "Merger" shall mean the merger of GECC-NY into the corporation to be effected pursuant to the terms of the Merger Agreement. (iv) "Merger Agreement" shall mean the Agreement and Plan of Merger between the corporation and GECC-NY, dated June 25, 2001, as the same may be amended, modified or supplemented. C. Each Dividend Period for shares of Variable Cumulative Preferred Stock shall be measured in either days (but not more than three hundred sixty-four (364)) or in full years (but not less than two (2) or more than thirty (30)), provided, that the minimum Dividend Period for (i) Auction Stock shall be seven (7) days and (ii) Remarketed Stock shall be one (1) Business Day. Each Dividend Period shall end on a Dividend Payment Date. D. Except as otherwise provided in the resolution authorizing Variable Cumulative Preferred Stock of a series, each Subsequent Dividend Period with respect to Auction Stock of such series shall be 49 days in duration, provided, that the corporation may establish the duration of any Subsequent Dividend Period subject to the limitations set forth in Subsection C of this Section Four by a notice sent by the corporation to all Holders of shares of Auction Stock of such series, by first- class mail, postage prepaid, to the address of each such Holder appearing on the record of stockholders of the corporation, not less than seven (7) days nor more than sixty (60) days prior to any Auction Date for such Subsequent Dividend Period, which notice shall specify the determination by the corporation of (i) the length of the next succeeding Dividend Period, (ii) in the case of any Dividend Period in excess of ninety-nine (99) days in duration, any Dividend Payment Date or Dates other than the last day of such Dividend Period and (iii) in the case of any Dividend Period equal to or in excess of two (2) years in duration, any dates on which shares of Auction Stock may be redeemed and the corresponding redemption prices. In the absence of any such notice with respect to a Subsequent Dividend Period, such period shall have a duration of forty-nine (49) days. In addition, in the event the corporation has elected a duration of more than forty-nine (49) days for a Subsequent Dividend Period, it may withdraw such election by a notice sent by the corporation to all Holders of shares of Auction Stock of such series by hand delivery or telecopier to the address of each such Holder appearing on the record of stockholders of the corporation by no later than 3:00 P.M., New York City time, on the Business Day immediately preceding the relevant Auction Date, and in such event such Subsequent Dividend Period will have a duration of forty-nine (49) days. No defect in the notice or in the mailing thereof shall affect the validity of the change in the Dividend Period for shares of Auction Stock. Notwithstanding the foregoing, in the event that Sufficient Clearing Bids have not been made so that the Dividend Rate for the next Dividend Period for a series of Auction Stock is equal to the Maximum Rate, then the duration of the Subsequent Dividend Period in respect of such series of Auction Stock shall be the lesser of (i) the length of such Dividend Period as specified by the corporation in a notice given pursuant to the preceding paragraph, or (ii) 49 days, and the -15- Maximum Rate shall be determined based upon the duration of the Dividend Period determined pursuant to the foregoing clause (i) or (ii). Except as provided in Subsection G of this Section Four, the Dividend Rate on the shares of Auction Stock of a series for each Subsequent Dividend Period shall be the rate per annum that results from an Auction for such series. E. Except as otherwise provided in Subsections F and G of this Section Four, each Subsequent Dividend Period for each share of Remarketed Stock and the Dividend Rate for each such Subsequent Dividend Period shall be established by the Remarketing Agent for such shares pursuant to the Remarketing Procedures, such determination to be conclusive and binding on the corporation and the Holder. If for any reason a share of Remarketed Stock is not remarketed on the day of its tender, such share shall have successive Dividend Periods of one (1) Business Day with a Dividend Rate equal to the Maximum Rate until such share is remarketed. F. Notwithstanding the provisions of Subsections D and E of this Section Four, the Dividend Rate which results from the application of the Auction Procedures or the Remarketing Procedures for any Subsequent Dividend Period for any share of Variable Cumulative Preferred Stock shall not be greater than the Maximum Rate for such share on the first day of the applicable Dividend Period. G. Notwithstanding the foregoing provisions of this Section Four, the application of the Auction Procedures and the Remarketing Procedures shall be suspended during the continuance of a Payment Failure and during such continuance dividends will accumulate on the shares of Variable Cumulative Preferred Stock for Dividend Periods commencing on and after the date such Payment Failure first occurred at two hundred per cent (200%) of the Applicable Determining Rate for Dividend Periods of one (1) Business Day, in the case of shares of Remarketed Stock, and forty-nine (49) days, in the case of shares of Auction Stock. In no event shall the Dividend Rate on any share of Variable Cumulative Preferred Stock be adjusted prior to the end of a Dividend Period for such share. If no Payment Failure continues to exist at the end of a Dividend Period, the application of the Auction Procedures and the Remarketing Procedures shall be resumed. H. The corporation shall pay to the Paying Agent not later than (i) in the case of Dividend Periods of one (1) Business Day, 4:00 P.M., New York City time, and (ii) in the case of all other Dividend Periods, 12:00 noon, New York City time, in each case, on each Dividend Payment Date for shares of Variable Cumulative Preferred Stock, an aggregate amount of funds available on such Dividend Payment Date in The City of New York, New York, equal to the dividends to be paid to all Holders of shares of such Variable Cumulative Preferred Stock on such Dividend Payment Date. All such moneys shall be held in trust for the payment of such dividends by the Paying Agent for the benefit of the Holders. -16- I. Each dividend shall be paid to the Holders whose names appear on the record of stockholders of the corporation on the Business Day next preceding the Dividend Payment Date, provided, that if the Dividend Rate with respect to the shares of Variable Cumulative Preferred Stock in respect of which a dividend is being paid is two hundred percent (200%) of the Applicable Determining Rate as a result of the occurrence of a Payment Failure, such dividend shall be paid to the Holders as their names appear on the record of stockholders of the corporation on such date, not exceeding fifteen (15) days preceding the payment date thereof, as may be fixed by the Board of Directors or a duly authorized committee thereof (which date shall not precede the date upon which the Board of Directors or the committee, as the case may be, fixes such date). Dividends in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date. J. The amount of dividends per share accumulated on each share of Variable Cumulative Preferred Stock during any Dividend Period less than one (1) year shall be computed by multiplying the Dividend Rate for such Dividend Period by a fraction, the numerator of which shall be the number of days in such Dividend Period (calculated by counting the first day thereof but excluding the last day thereof) and the denominator of which shall be three hundred sixty (360), and multiplying One Hundred Thousand Dollars ($100,000) by the rate obtained. During any Dividend Period of two (2) years or longer, the amount of dividends per share accumulated on each share of Variable Cumulative Preferred Stock shall be computed by multiplying the Dividend Rate for each year in such Dividend Period by a fraction the numerator of which is the actual number of days in such year (provided that if such year is the last year of such Dividend Period the last day of such year shall be excluded) and the denominator of which shall be three hundred sixty (360) and multiplying one hundred thousand dollars ($100,000) by the rate obtained. K. At any time after all preferential dividends on the Variable Cumulative Preferred Stock of all series for all previous Dividend Periods shall have been declared and paid or set apart for payment, the Board of Directors may, after or concurrently with, but not before the declaration of full preferential dividends on the Variable Cumulative Preferred Stock of all series for the current Dividend Period, declare dividends (payable in cash, property or stock) on outstanding shares of Junior Stock (subject to the observance of any applicable priorities as between classes of Junior Stock), out of any funds or assets legally available for that purpose. The declaration, payment, and setting apart of dividends upon any Junior Stock shall also be subject to any terms and provisions of each series of the Variable Cumulative Preferred Stock fixed for such series. SECTION FIVE. Auction Procedures. ----------------- A. Orders by Existing Holders and Potential Holders. ------------------------------------------------ (1) On or prior to the Submission Deadline for each Auction Date for a series: -17- (a) each Existing Holder may submit to a Broker-Dealer information as to: (i) the number of Outstanding shares of Subject Auction Stock, if any, held by such Existing Holder which such Existing Holder desires to continue to hold without regard to the rate determined by the Auction Procedures for the next succeeding Dividend Period; (ii) the number of Outstanding shares of Subject Auction Stock, if any, that such Existing Holder desires to continue to hold if the rate determined by the Auction Procedures for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Existing Holder; and/or (iii) the number of Outstanding shares of Subject Auction Stock, if any, held by such Existing Holder which such Existing Holder offers to sell without regard to the rate determined by the Auction Procedures for the next succeeding Dividend Period; and (b) one or more Broker-Dealers shall in good faith, for the purpose of conducting a competitive Auction in a commercially reasonable manner, contact Potential Holders, including Persons that are not Existing Holders, by telephone or otherwise to determine the number of shares of Subject Auction Stock, if any, which each such Potential Holder offers to purchase, provided that the rate determined by the Auction Procedures for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Holder. For the purposes hereof, the communication to a Broker-Dealer of information referred to in Subparagraph (a)(i), (a)(ii), or (a)(iii) or (b) of this paragraph 1 is hereinafter referred to as an "Order" and collectively as "Orders" and each Existing Holder and each Potential Holder placing an Order is hereafter referred to as a "Bidder" and collectively as "Bidders"; an order containing the information referred to in Subparagraph (a)(i) of this paragraph 1 is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders"; an Order containing the information referred to in Subparagraph (a)(ii) or (b) of this paragraph 1 is hereinafter referred to as a "Bid" and collectively as "Bids"; and an order containing the information referred to in Subparagraph (a)(iii) of this paragraph 1 is hereinafter referred to as a "Sell Order" and collectively as "Sell Orders." (c) a Bid by an Existing Holder shall constitute an irrevocable offer to sell: (i) the number of Outstanding shares of Subject Auction Stock specified in such Bid if the rate determined by the Auction Procedures on such Auction Date shall be less than the rate specified therein; or (ii) such number or a lesser number of Outstanding shares of Subject Auction Stock to be determined as set forth in Subsection (D)(1)(d) of this Section Five if -18- the rate determined by the Auction Procedures on such Auction Date shall be equal to the rate specified therein; or (iii) such number or a lesser number of Outstanding shares of Subject Auction Stock to be determined as set forth in Subsection (D)(2)(c) of this Section Five if the rate specified therein shall be higher than the Maximum Rate and Sufficient Clearing Bids do not exist; and (d) a Sell Order by an Existing Holder shall constitute an irrevocable offer to sell: (i) the number of Outstanding shares of Subject Auction Stock specified in such Sell Order, or (ii) such number or a lesser number of Outstanding shares of Subject Auction Stock as set forth in Subsection (D)(2)(c) of this Section Five if Sufficient Clearing Bids do not exist; and (e) a Bid by a Potential Holder shall constitute an irrevocable offer to purchase: (i) the number of Outstanding shares of Subject Auction Stock specified in such Bid if the rate determined by the Auction Procedures on such Auction Date shall be higher than the rate specified therein; or (ii) such number or a lesser number of Outstanding shares of Subject Auction Stock as set forth in Subsection (D)(1)(e) of this Section Five if the rate determined by the Auction Procedures on such Auction Date shall be equal to the rate specified therein. B. Submission of Orders by Broker-Dealers to Trust Company. ------------------------------------------------------- (1) Each Broker-Dealer shall submit in writing to the Trust Company prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer and specify with respect to each Order: (a) the name of the Bidder placing such Order; (b) the aggregate number of shares of Subject Auction Stock that are the subject of such Order; (c) to the extent that such Bidder is an Existing Holder: -19- (i) the number of shares of Subject Auction Stock, if any, subject to any Hold Order placed by such Existing Holder; (ii) the number of shares of Subject Auction Stock, if any, subject to any Bid placed by such Existing Holder and the rate specified in such Bid; and (iii) the number of shares of Subject Auction Stock, if any, subject to any Sell Order placed by such Existing Holder; and (d) to the extent such Bidder is a Potential Holder, the rate specified in such Potential Holder's Bid. (2) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Trust Company shall round such rate up to the next highest one thousandth (.001) of 1%. (3) If an Order or Orders covering all of the Outstanding shares of Subject Auction Stock held by any Existing Holder is or are not submitted for any reason to the Trust Company prior to the Submission Deadline, the Trust Company shall deem a Hold Order to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of Subject Auction Stock held by such Existing Holder and not subject to Orders submitted to the Trust Company, except that (i) a Sell Order will be deemed to have been submitted on behalf of an Existing Holder if an Order is not submitted on behalf of such Existing Holder in the case of an Auction for a Dividend Period which differs in duration by more than seven (7) days from the preceding Dividend Period or an Auction for a Dividend Period of two (2) years or more and (ii) a Sell Order will be deemed to have been submitted on behalf of a holder of Converted Remarketed Stock if an Order is not submitted on behalf of such Holder or if such Holder has not delivered a Master Purchaser's Letter to the Trust Company by no later than 3:00 P.M., New York City time, on the Business Day immediately preceding the relevant Auction Date. (4) If one or more Orders covering in the aggregate more than the number of Outstanding shares of Subject Auction Stock held by any Existing Holder are submitted to the Trust Company, such Orders shall be considered valid as follows and in the following order of priority: (a) all Hold Orders shall be considered valid, but only up to and including in the aggregate the number of shares of Subject Auction Stock held by such Existing Holder, and, if the number of shares of Subject Auction Stock subject to such Hold Orders exceeds the number of shares of Subject Auction Stock held by such Existing Holder, the number of shares of Subject Auction Stock subject to each such Hold Order shall be reduced pro rata to cover the number of shares of Subject Auction Stock held by such Existing Holder; -20- (b) (i) any Bid shall be considered valid up to and including the excess of the number of Outstanding shares of Subject Auction Stock held by such Existing Holder over the number of shares of Subject Auction Stock subject to any Hold order referred to in subparagraph (a) above, (ii) subject to clause (i), if more than one Bid with the same rate is submitted on behalf of such Existing Holder and the number of shares of Subject Auction Stock subject to such Bids is greater than such excess, such Bids shall be considered valid up to the amount of such excess, and the number of shares of Subject Auction Stock subject to each Bid with the same rate shall be reduced pro rata to cover the number of shares equal to such excess, (iii) subject to clause (i), if more than one Bid with different rates is submitted on behalf of such Existing Holder, such Bids shall be considered valid in the ascending order of their respective rates up to the amount of such excess, and (iv) in any such event the number, if any, of such shares of Subject Auction Stock subject to Bids not valid under this Subparagraph (b) shall be treated as the subject of a Bid by a Potential Holder; and (c) all Sell Orders shall be considered valid but only up to and including in the aggregate the excess of the number of Outstanding shares of Subject Auction Stock held by such Existing Holder over the sum of the shares of Subject Auction Stock subject to Hold Orders referred to in Subparagraph (a) and valid Bids by Existing Holders referred to in Subparagraph (b) above. (5) If more than one bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate therein specified. (6) Separate Auctions for more than one series of Variable Cumulative Preferred Stock may be held on any Auction Date. If on any Auction Date two or more series of Variable Cumulative Preferred Stock with Dividend Periods of the same length will be auctioned, then a single Auction shall be held with respect to all of such series, and all references to Subject Auction Stock in this Section Five with respect to such Auction shall be deemed to be references to the Subject Auction Stock of all of such series, collectively. C. Determination of Sufficient Clearing Bids, Winning Bid Rate and Dividend ------------------------------------------------------------------------ Rate. - ----- (1) Not earlier than the Submission Deadline on each Auction Date, the Trust Company shall assemble all Orders submitted or deemed submitted to it by Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the -21- case may be, or as "Submitted Orders") and shall determine: (a) the excess of the total number of Outstanding shares of Subject Auction Stock over the number of Outstanding shares of Subject Auction Stock that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Auction Stock"); (b) from the Submitted Orders whether the number of Outstanding shares of Subject Auction Stock that are the subject of Submitted Bids by Potential Holders specifying one or more rates equal to or lower than the Maximum Rate exceeds or is equal to the sum of: (i) the number of Outstanding shares of Subject Auction Stock that are the subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Rate, and (ii) the number of Outstanding shares of Subject Auction Stock that are subject to Submitted Sell Orders (in the event of such excess or such equality other than because the number of shares in Subparagraphs (b)(i) and (b)(ii) above is zero because all of the Outstanding shares of Subject Auction Stock are the subject of Submitted Hold Orders, such Submitted Bids in this Subparagraph (b) being hereinafter referred to collectively as "Sufficient Clearing Bids"); and (c) if Sufficient Clearing Bids exist, the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which if: (i) (A) each Submitted Bid from Existing Holders specifying such lowest rate and (B) all other Submitted Bids from Existing Holders specifying lower rates were accepted, thus entitling such Existing Holders to continue to hold the shares of Subject Auction Stock that are the subject of such Submitted Bids, and (ii) (A) each Submitted Bid from Potential Holders specifying such lowest rate and (B) all other Submitted Bids from Potential Holders specifying lower rates were accepted, thus entitling the Potential Holders to purchase the shares of Subject Auction Stock that are the subject of those Submitted Bids, would result in such Existing Holders described in clause (i) continuing to hold an aggregate number of Outstanding shares of Subject Auction Stock which, when added to the number of Outstanding shares of Subject Auction Stock to be purchased by such Potential Holders described in this clause (ii) would equal not less than the Available Auction Stock. (2) Promptly after the Trust Company has made the determinations pursuant to paragraph (1) of this Section (C), the Trust Company shall advise the corporation of the Applicable -22- Determining Rate and the Maximum Rate and, based on such determinations, the Dividend Rate for the next succeeding Dividend Period as follows: (a) if Sufficient Clearing Bids exist, the Dividend Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate so determined; (b) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding shares of Subject Auction Stock are the subject of Submitted Hold Orders), the Dividend Rate for the next succeeding Dividend Period shall be equal to the Maximum Rate; or (c) if all of the Outstanding shares of Subject Auction Stock are the subject of Submitted Hold Orders, the Dividend Rate for the next succeeding Dividend Period shall be equal to 58% of the Applicable Determining Rate. D. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders -------------------------------------------------------------------- and Allocation of Shares. Based on the determinations made pursuant to - ------------------------- Subsection (C)(1), the Submitted Bids and the Submitted Sell Orders shall be accepted or rejected and the Trust Company shall take such other actions as set forth below: (1) If Sufficient Clearing Bids have been made, subject to the provisions of paragraphs (3) and (4) of this Subsection D, Submitted Bids and Submitted Sell Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (a) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bids of each of the Existing Holders specifying any rate that is higher than the Winning Bid Rate shall be rejected, thus requiring each such Existing Holder to sell the shares that are the subject of such Submitted Bids; (b) the Submitted Bids of each of the Existing Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder to continue to hold the shares that are the subject of such Submitted Bids; (c) the Submitted Bids of each of the Potential Holders specifying any rate that is lower than the Winning Bid Rate shall be accepted; (d) the Submitted Bids of each of the Existing Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted, thus entitling each such Existing Holder to continue to hold the shares that are the subject of such Submitted Bids, unless the number of Outstanding shares of Subject Auction Stock subject to all such Submitted Bids shall be greater than the number of shares ("Remaining Shares") equal to the excess of the Available Auction Stock over the number of shares of Subject Auction Stock subject to Submitted Bids described in Subparagraphs -23- (b) and (c) of this paragraph (1), in which event the Submitted Bids of each such Existing Holder shall be rejected, and each such Existing Holder shall be required to sell shares of Subject Auction Stock, but only in an amount equal to the difference between (x) the number of Outstanding shares of Subject Auction Stock then held by such Existing Holder subject to such Submitted Bids and (y) the number of shares obtained by multiplying the number of Remaining Shares by a fraction, the numerator of which shall be the number of Outstanding shares of Subject Auction Stock held by suchExisting Holder subject to such Submitted Bids, and the denominator of which shall be the sum of the number of Outstanding shares of Subject Auction Stock subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and (e) the Submitted Bids of each of the Potential Holders specifying a rate that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of shares obtained by multiplying the difference between the Available Auction Stock and the number of shares of Subject Auction Stock subject to Submitted Bids described in Subparagraphs (b), (c) and (d) of this paragraph (1) by a fraction, the numerator of which shall be the number of Outstanding shares of Subject Auction Stock subject to such Submitted Bids, and the denominator of which shall be the sum of the number of Outstanding shares of Subject Auction Stock subject to such Submitted Bids made by all such Potential Holders that specified a rate equal to the Winning Bid Rate. (2) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of Subject Auction Stock are subject to Submitted Hold Orders), subject to the provisions of paragraphs (3) and (4) of this Subsection D, Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected: (a) the Submitted Bids of each Existing Holder specifying any rate that is equal to or lower than the Maximum Rate shall be accepted, thus entitling such Existing Holder to continue to hold the shares of Subject Auction Stock that are the subject of such Submitted Bids; (b) the Submitted Bids of each Potential Holder specifying any rate that is equal to or lower than the Maximum Rate shall be accepted; and (c) the Submitted Bids of each Existing Holder specifying any rate that is higher than the Maximum Rate shall be rejected and the Submitted Sell Orders of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (A) the number of Outstanding shares of Subject Auction Stock then held by such Existing Holder subject to such Submitted Bids or Submitted Sell Orders and (B) the number of shares obtained by multiplying the difference between the Available Auction Stock and the aggregate number of shares of Subject Auction Stock subject to Submitted Bids described in Subparagraphs (a) and (b) of this paragraph (2) by a fraction, the numerator of which shall be the number of Outstanding shares of Subject Auction Stock held by such Existing Holder subject to such Submitted Bids or Submitted -24- Sell Orders, and the denominator of which shall be the number of Outstanding shares of Subject Auction Stock subject to all such Submitted Bids and Submitted Sell Orders. (3) If as a result of the procedures described in paragraph (1) or (2) of this Subsection D, any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share of Subject Auction Stock on any Auction Date, the Trust Company shall, in such manner as, in its sole discretion it shall determine, round up or down the number of shares to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that the number of shares purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole shares. (4) If, as a result of the procedures described in paragraph (1) of this Subsection D, any Potential Holder would be entitled or required to purchase less than a whole share of Subject Auction Stock on any Auction Date, the Trust Company shall, in such manner as, in its sole discretion it shall determine, allocate shares for purchase among Potential Holders so that only whole shares are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing shares on such Auction Date. SECTION SIX. Remarketing Procedures. ---------------------- A. Determination of Dividend Periods and Rates for Remarketed Stock. Subject to Subsections F and G of Section Four hereof, the Remarketing Agent for each share of Remarketed Stock shall establish (i) that Dividend Period for such share of Remarketed Stock which it shall determine will result in the lowest overall cost of capital to the corporation in respect of all of the shares of Remarketed Stock for which it shall be acting as Remarketing Agent (taking into account the cost of administering such shares) and (ii) that Dividend Rate (which shall not exceed the Maximum Rate) for each Dividend Period for such share of Remarketed Stock which it shall determine would be the rate, but no higher than the rate, which would permit such share to be remarketed at One Hundred Thousand Dollars ($100,000). In establishing each Dividend Period and Dividend Rate, each Remarketing Agent shall take into account the following factors ("Remarketing Conditions"): (i) short-term and long-term market rates and indices of such short-term and long-term rates, (ii) market supply and demand for short-term and long-term securities, (iii) yield curves for short-term and long-term securities comparable to the shares, (iv) industry and financial conditions which may affect the shares, (v) the number of shares to be remarketed, (vi) the number of potential purchasers, and (vii) the Dividend Periods and Dividend Rates at which current and potential Holders would remain or become Holders. B. Remarketing; Tender for Remarketing. The following procedures shall be applicable to each Remarketed Share: (1) The Remarketing Agent. The corporation shall take all reasonable action necessary so that, at all times, one or more investment banks, brokers, dealers or other organizations -25- qualified to remarket shares of Remarketed Stock and to establish Dividend Periods and Dividend Rates as herein provided shall act as Remarketing Agent for each share of Remarketed Stock. On the first day of each Dividend Period for each share of Remarketed Stock tendered for remarketing on such day, the relevant Remarketing Agent shall use its best efforts to remarket such share for the Holder thereof, without charge to such Holder, provided, such Remarketing Agent shall not be obligated to remarket such share if there shall be a material misstatement or omission in any disclosure document used in connection with the remarketing of such share or at any time the Remarketing Agent shall have determined that it is not advisable to remarket such share by reason of: (a) a pending or proposed change in applicable tax laws, (b) a material adverse change in the financial condition of the corporation, (c) a banking moratorium, (d) domestic or international hostilities, (e) an amendment of this Certificate of Incorporation which materially and adversely changes the nature of the shares or the Remarketing Procedures or (f) a Payment Failure. Should the Remarketing Agent for any share of Remarketed Stock not succeed in so remarketing all such shares of Remarketed Stock tendered for remarketing on any date, the Remarketing Agent shall select the shares of such Remarketed Stock to be sold from those tendered pro rata. Payments for shares of Remarketed Stock remarketed shall be made by the Remarketing Agent (or such other agent as the corporation may appoint) on the date of remarketing by crediting such payments to the accounts of the Holders thereof maintained by the Remarketing Agent (or such other agent as the corporation may appoint) or, to the extent duly requested by Holders, by wire or other transfer in immediately available funds to their accounts with commercial banks in the United States, but, in either case, only upon surrender to the Remarketing Agent (or such other agent as the corporation may appoint) of the certificates representing such shares of Remarketed Stock, properly endorsed for transfer. (2) Notice of Shares to be Retained. Each share of Remarketed Stock shall be deemed to have been tendered to the Remarketing Agent (or such other agent as the corporation may appoint) for sale by remarketing on the last day of each Dividend Period, unless the Holder thereof shall have given irrevocable notice to the contrary to the Remarketing Agent for such share of Remarketed Stock or, if so instructed by such Remarketing Agent, to such other agent as the corporation may appoint. Such notice, which may be telephonic or written, must be delivered to such agent prior to 3:00 P.M., New York City time, on (i) the Business Day immediately preceding the last day of the Dividend Period or on such earlier day specified in a notice, if any, mailed by the Remarketing Agent (or such other agent as the corporation may appoint at the direction of such Remarketing Agent) to such Holder at its address as shown on the record of stockholders of the corporation, which day shall be a Business Day at least four (4) Business Days after the mailing of such notice. The notice from such Holder of an election to retain shares of Remarketed Stock shall state (i) the number of the certificate representing the shares of Remarketed Stock not to be deemed to have been so tendered, unless such certificate is held by the Remarketing Depository, (ii) the number of shares of Remarketed Stock represented by such certificate or, in the case of shares of Remarketed Stock held by the Remarketing Depository, the number of shares so held, and (iii) the number of such shares of Remarketed Stock which shall be deemed not to have been so tendered. -26- (3) Shares Deemed to have been Tendered. The failure to give notice with respect to any share of Remarketed Stock as provided in Subsection B(2) shall constitute the irrevocable tender for remarketing of such share. Certificates representing shares so tendered and remarketed shall be issued to the purchasers thereof, irrespective of whether the certificates formerly representing such shares shall have been delivered to the Remarketing Agent (or such other agent as the corporation may appoint). Thereupon, such shares shall cease to accumulate dividends payable to the former Holders thereof, which shall have no further rights with respect to such shares, except the right to receive any previously declared but unpaid dividends thereon and the proceeds of theremarketing thereof upon surrender of the certificates representing such shares to the Remarketing Agent (or such other agent as the corporation may appoint) properly endorsed for transfer. (4) Funds for Purchase of Shares. Shares of Remarketed Stock tendered for remarketing as provided in this Section Six shall be purchased solely from the proceeds received from the purchasers of such shares in a remarketing. Neither the corporation, the Tender Agent nor any Remarketing Agent (nor any other agent which the corporation may appoint) shall be obligated to provide funds to make payment to the Holders of shares so tendered. SECTION SEVEN. Miscellaneous. ------------- A. The Board of Directors or a duly authorized committee thereof may interpret the provisions hereof to resolve any inconsistency or ambiguity which may arise or be revealed in connection with the Auction Procedures or the Remarketing Procedures provided for herein. B. So long as the Dividend Rate is based on the results of an Auction, an Existing Holder (a) may sell, transfer or otherwise dispose of shares of Auction Stock only pursuant to a Bid or Sell Order in accordance with the Auction Procedures or to or through a Broker-Dealer or to a Person that shall have delivered a signed copy of a Master Purchaser's Letter to the Trust Company, provided, that in the case of all transfers other than pursuant to Auctions, such Existing Holder, its Agent Member or its Broker-Dealer advises the Trust Company of such transfer, and (b) shall have the ownership of the shares of Variable Cumulative Preferred Stock of the series held by it maintained in book entry form by the Auction Stock Depository in the account of its Agent Member, which in turn will maintain records of such Existing Holder's beneficial ownership. C. Neither the corporation nor any Affiliate thereof may submit an Order in any Auction, except as set forth in the next sentence. Any Broker-Dealer that is an Affiliate of the corporation may submit Orders in Auctions but only if such orders are not for its own account, except that if such affiliated Broker-Dealer holds shares of Variable Cumulative Preferred Stock for its own account, it must submit a Sell Order in the next Auction with respect to such shares. -27- D. The Trust Company shall reject any Submitted Order of the corporation or an Affiliate, except for Orders of affiliated Broker-Dealers permitted under Subsection C of this Section Seven. E. Unless preferential dividends on the Variable Cumulative Preferred Stock or the Preferred Stock are in arrears, the corporation shall have the right from time to time (if and to the extent at the time permitted under applicable law) to purchase on the open market or at private sale, or otherwise acquire, Outstanding shares of Variable Cumulative Preferred Stock of any series at a price not exceeding the price at which such stock might at the time be redeemed at the option of the corporation, plus an amount equal to accumulated and unpaid preferential dividends to the date of acquisition. F. Upon the selection of a Dividend Determination Method for a series of Variable Cumulative Preferred Stock other than the Dividend Determination Method then applicable to such series, the Holders of the shares of such series shall, upon request of the corporation, surrender the certificates for such shares to the Auction Stock Depository, in the case of the selection of the Auction Method, or the Remarketing Depository, in the case of the selection of the Remarketing Method. In the event a Holder fails to so surrender its certificates as aforesaid, such certificates shall be deemed canceled and the corporation shall issue a new certificate to the Auction Stock Depository or the Remarketing Depository, as the case may be. G. The purchase price of each share of Variable Cumulative Preferred Stock which is sold either through the Auction Procedures or the Remarketing Procedures shall be One Hundred Thousand Dollars ($100,000). SECTION EIGHT. Redemption. ---------- A. The shares of any Variable Cumulative Preferred Stock of each series shall be subject to redemption as a whole or in part only in whole shares at the option of the corporation on one of the following dates (each such date is hereinafter referred to herein as a "redemption date") (i) on the last day of any Dividend Period at a redemption price of One Hundred Thousand Dollars ($100,000) per share, plus an amount equal to accumulated and unpaid dividends to the date fixed for redemption and (ii) in the case of shares of Variable Cumulative Preferred Stock with a Dividend Period equal to or more than two (2) years, on any Dividend Payment Date for such shares at redemption prices determined by the corporation prior to the commencement of such Dividend Period plus an amount equal to accumulated and unpaid dividends to the redemption date, on not less than thirty (30) nor more than sixty (60) days' notice by mail, first-class, postage prepaid, such notice to be addressed to the Holder at the address for such Holder as shown on the record of stockholders of the corporation, provided, that such redemption prices in respect of all shares of all series of Variable Cumulative Preferred Stock authorized hereunder shall not exceed Three Billion Eight Hundred Million Dollars ($3,800,000,000) in the aggregate. -28- B. Notwithstanding the foregoing, if any dividends on shares of Variable Cumulative Preferred Stock are in arrears, no shares of Variable Cumulative Preferred Stock shall be redeemed unless all Outstanding shares of Variable Cumulative Preferred Stock are simultaneously redeemed, and the corporation shall not purchase or otherwise acquire any shares of Variable Cumulative Preferred Stock, provided, that the foregoing shall not prevent the purchase or acquisition of shares of Variable Cumulative Preferred Stock pursuant to a purchase or exchange offer made on the same terms to Holders of all Outstanding shares of Variable Cumulative Preferred Stock. C. Each Holder of shares of Variable Cumulative Preferred Stock called for redemption shall surrender the certificate or certificates, if any, evidencing such shares to the corporation at theplace designated in such notice and shall thereupon be entitled to receive payment of the redemption price plus an amount equal to accumulated and unpaid dividends to the redemption date therefor. D. If fewer than all of the Outstanding shares of Variable Cumulative Preferred Stock of any series are to be redeemed as set forth above, the number of shares to be redeemed shall be determined by the Board of Directors of the corporation (or any committee to which it may duly delegate the authority granted in this paragraph), and such shares shall be redeemed pro rata from the Holders of record of such shares in proportion to the number of such shares held by such Holders (with adjustments to avoid redemption of fractional shares). If fewer than all of the shares of Variable Cumulative Preferred Stock represented by any certificate surrendered for redemption are redeemed (in the case where certificates are issued directly to the Holders), the corporation shall, without charge, issue a new certificate representing the unredeemed shares. E. If notice of redemption shall have been given, and if on or before the redemption date specified in such notice all funds necessary for such redemption (including any dividend payable on such redemption date) shall have been (i) set aside by the corporation separate and apart from its other funds, in trust for the account of the Holders of the shares to be so redeemed, so as to be and continue to be available therefor, or (ii) deposited by the corporation in trust, for the account of the Holders of the shares to be redeemed, with a bank or trust company in good standing, organized under the laws of the United States of America or the State of New York, doing business in the Borough of Manhattan, the City of New York; then, notwithstanding that any certificate, if any, for shares so called for redemption shall not have been surrendered for cancellation, from and after the date fixed for redemption, the shares represented thereby shall no longer be deemed Outstanding, the right to receive dividends thereon shall cease to accumulate and all rights with respect to the shares so called for redemption shall forthwith on such redemption date cease and terminate, except only the right of the Holders thereof to receive out of funds so set aside or so deposited in trust, the amount payable upon redemption thereof, without interest. After the date designated for redemption such shares of Variable Cumulative Preferred Stock shall not be transferable on the books of the corporation. Except as otherwise set forth in Section Seven, nothing herein contained shall limit any legal right of the corporation to purchase or otherwise acquire any share of said series. -29- F. Whenever any shares of Variable Cumulative Preferred Stock are acquired by the corporation by purchase or are redeemed or otherwise retired, the same shall be canceled and either such shares shall be eliminated from the authorized shares of Variable Cumulative Preferred Stock, if at the time permitted under applicable law, such shares may be restored to the status of authorized but undesignated and unissued shares of Variable Cumulative Preferred Stock. G. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the record holder receives the notice. In any case, failure duly to give such notice to the Holder of any shares of any series of Variable Cumulative Preferred Stock, designated for redemption, in whole or in part, or any defect in such notice shall not affect the validity of the proceedings for the redemption of any other shares of a series. SECTION NINE. Sinking Fund. ------------ There shall not be any sinking fund for the redemption of any shares of any series of Variable Cumulative Preferred Stock. SECTION TEN. Liquidation Preference. ---------------------- A. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the Holders of shares of Variable Cumulative Preferred Stock of each series shall be entitled to receive out of assets of the corporation available for distribution to stockholders, before any distribution of assets of the corporation is made to holders of Junior Stock, One Hundred Thousand Dollars ($100,000) per share plus an amount equal to accumulated and unpaid dividends to the date of distribution. B. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the amounts payable with respect to each series of the Variable Cumulative Preferred Stock, the Preferred Stock and any other shares of stock of the corporation ranking as to any such distribution on a parity with the Variable Cumulative Preferred Stock are not paid in full, the holders of the Variable Cumulative Preferred Stock and of all such other shares shall share ratably in any such distribution of assets of the corporation in proportion to the full respective preferential amounts to which they are entitled assuming all amounts thereon were paid in full. C. After payment to the Holders of the Variable Cumulative Preferred Stock of the full preferential amounts to which they are entitled, the Holders of the shares of Variable Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the corporation. The merger or consolidation of the corporation into or with any other corporation shall not be or be deemed to be a liquidation, dissolution or winding up for purposes of this Section Ten. SECTION ELEVEN. Voting Rights. ------------- -30- Holders of the Variable Cumulative Preferred Stock of any series are not entitled to any voting rights, except as otherwise provided herein or as may be required by law. SECTION TWELVE. Actions Requiring Stockholder Approval. --------------------------------------- A. So long as any of the shares of a series of Variable Cumulative Preferred Stock shall remain Outstanding, the corporation shall not, without the consent of the Holders of at least two- thirds of the total number of shares of such series of Variable Cumulative Preferred Stock then Outstanding, given in person or by proxy either in writing or at a meeting of stockholders called for that purpose, amend or alter any of the preferences, privileges and voting powers or other restrictions or qualifications of the Variable Cumulative Preferred Stock of such series in any manner subsantially prejudicial to the holders thereof. B. Any consent of any stockholders required by the provisions of Subsection A of this Section Twelve shall be in addition to any other consent or approval of stockholders which may be required by any provisions of the laws of the State of Delaware, or by any provisions of this Certificate of Incorporation, as to any action referred to in said Subsection A, and no such action shall be taken without compliance with any such provisions of said law or Certificate of Incorporation. SECTION THIRTEEN. Variable Cumulative Preferred Stock, Series A, Variable Cumulative Preferred Stock, Series B, Variable Cumulative Preferred Stock, Series C and Variable Cumulative Preferred Stock, Series D. There are hereby created four series of the Variable Cumulative Preferred Stock, each series to consist of 725 shares, and such series to be designated respectively the "Variable Cumulative Preferred Stock, Series A" (the "Series A Shares"), the "Variable Cumulative Preferred Stock, Series B" (the "Series B Shares"), the "Variable Cumulative Preferred Stock, Series C" (the "Series C Shares") and the "Variable Cumulative Preferred Stock, Series D" (the "Series D Shares"). SECTION FOURTEEN. Variable Cumulative Preferred Stock, Series E, Variable Cumulative Preferred Stock, Series F and Variable Cumulative Preferred Stock, Series G. There are hereby created three series of the Variable Cumulative Preferred Stock, each series to consist of 700 shares, and such series to be designated respectively the "Variable Cumulative Preferred Stock, Series E" (the "Series E Shares"), the "Variable Cumulative Preferred Stock, Series F" (the "Series F Shares") and the "Variable Cumulative Preferred Stock, Series G" (the "Series G Shares"). -31- SECTION FIFTEEN. Variable Cumulative Preferred Stock, Series H and Variable Cumulative Preferred Stock, Series I. There are hereby created two series of the Variable Cumulative Preferred Stock, each series to consist of 500 shares, and such series to be designated respectively the "Variable Cumulative Preferred Stock, Series H" (the "Series H Shares") and the "Variable Cumulative Preferred Stock, Series I" (the "Series I Shares"). SECTION SIXTEEN. Variable Cumulative Preferred Stock, Series J and Variable Cumulative Preferred Stock, Series K. There are hereby created two series of the Variable Cumulative Preferred Stock, each series to consist of 500 shares, and such series to be designated respectively the "Variable Cumulative Preferred Stock, Series J" (the "Series J Shares") and the "Variable Cumulative Preferred Stock, Series K" (the "Series K Shares"). SECTION SEVENTEEN. Variable Cumulative Preferred Stock, Series L and Variable Cumulative Preferred Stock, Series M. There are hereby created two series of the Variable Cumulative Preferred Stock, each series to consist of 500 shares, and such series to be designated respectively the "Variable Cumulative Preferred Stock, Series L" (the "Series L Shares") and the "Variable Cumulative Preferred Stock, Series M" (the "Series M Shares"). SECTION EIGHTEEN. Variable Cumulative Preferred Stock, Series N. There are hereby created a series of the Variable Cumulative Preferred Stock, such series to consist of 750 shares, and such series to be designated the Variable Cumulative Preferred Stock, Series N (the "Series N Shares"). SECTION NINETEEN. Variable Cumulative Preferred Stock, Series O; Variable Cumulative Preferred Stock, Series P; and Variable Cumulative Preferred Stock, Series Q. There are hereby created three series of the Variable Cumulative Preferred Stock, consisting of 500 shares to be designated the "Variable Cumulative Preferred Stock, Series O" (the "Series O Shares"), 750 shares to be designated the "Variable Cumulative Preferred Stock, Series P" (the "Series P Shares"), and 500 shares to be designated the "Variable Cumulative Preferred Stock, Series Q" (the "Series Q Shares"). SECTION TWENTY. Variable Cumulative Preferred Stock, Series R; Variable Cumulative Preferred Stock, Series S; Variable Cumulative Preferred Stock, Series T; Variable -32- Cumulative Preferred Stock, Series U; Variable Cumulative Preferred Stock, Series V; and Variable Cumulative Preferred Stock, Series W. A. Designations. ------------ There are hereby created six series of the Variable Cumulative Preferred Stock, consisting of 700 shares to be designated the "Variable Cumulative Preferred Stock, Series R" (the "Series R Shares"), 650 shares to be designated the "Variable Cumulative Preferred Stock, Series S" (the "Series S Shares"), 650 shares to be designated the "Variable Cumulative Preferred Stock, Series T" (the "Series T Shares"), 500 shares to be designated the "Variable Cumulative Preferred Stock, Series U" (the "Series U Shares"), 500 shares to be designated the "Variable Cumulative Preferred Stock, Series V" (the "Series V Shares") and 500 shares to be designated the "Variable Cumulative Preferred Stock, Series W" (the "Series W Shares"). B. Not Applicable. --------------- The last sentence in the definition of "Dividend Payment Date" contained in Article FOURTH is hereby made inapplicable solely with respect to the Series R Shares and the Series W Shares. SECTION TWENTY-ONE. Variable Cumulative Preferred Stock, Series X; Variable Cumulative Preferred Stock, Series X-1; and Variable Cumulative Preferred Stock, Series Y; Variable Cumulative Preferred Stock, Series Y-1 and Variable Cumulative Preferred Stock, Series Z. A. Designation. ----------- There are hereby created five series of the Variable Cumulative Preferred Stock, consisting of 750 shares to be designated the "Variable Cumulative Preferred Stock, Series X" (the "Series X Shares"), 750 shares to be designated the "Variable Cumulative Preferred Stock, Series X-1" (the "Series X-1 Shares"), 750 shares to be designated the "Variable Cumulative Preferred Stock, Series Y" (the "Series Y Shares"), 750 shares to be designated the "Variable Cumulative Preferred Stock, Series Y-1" (the "Series Y-1 Shares") and 1,000 shares to be designated the "Variable Cumulative Preferred Stock, Series Z" (the "Series Z Shares"). B. Not Applicable. -------------- With respect to the Series X Shares, Series X-1 Shares, Series Y Shares, Series Y-1 Shares and Series Z Shares (i) the words "less than one (1) year" in the first sentence of Paragraph J of Section FOUR of subparagraph (c) of Article FOURTH and (ii) the last sentence thereof in each case be deleted and shall not apply. -33- SECTION TWENTY-TWO. Variable Cumulative Preferred Stock, Series AA; Variable Cumulative Preferred Stock, Series BB; Variable Cumulative Preferred Stock, Series CC; and Variable Cumulative Preferred Stock, Series DD. A. Designation. ----------- There are hereby created four series of the Variable Cumulative Preferred Stock, consisting of 500 shares to be designated the "Variable Cumulative Preferred Stock, Series AA" (the "Series AA Shares"), 500 shares to be designated the "Variable Cumulative Preferred Stock, Series BB" (the "Series BB Shares"), 500 shares to be designated the "Variable Cumulative Preferred Stock, Series CC" (the "Series CC Shares"), and 500 shares to be designated the "Variable Cumulative Preferred Stock, Series DD" (the "Series DD Shares"). -34- B. Not Applicable. -------------- With respect to the Series AA Shares, Series BB Shares, Series CC Shares and Series DD Shares the words "less than one (1) year" in the first sentence of Paragraph J of Section FOUR of subparagraph (c) of Article FOURTH shall be deleted and not apply. SECTION TWENTY-THREE. Variable Cumulative Preferred Stock, Series EE; Variable Cumulative Preferred Stock, Series FF; Variable Cumulative Preferred Stock, Series GG; and Variable Cumulative Preferred Stock, Series HH. A. Designation. ----------- There are hereby created four series of Variable Cumulative Preferred Stock, consisting of 500 shares to be designated the "Variable Cumulative Preferred Stock, Series EE" (the "Series EE Shares"), 500 shares to be designated "Variable Cumulative Preferred Stock, Series FF" (the "Series FF Shares"), 650 shares to be designated the "Variable Cumulative Preferred Stock, Series GG" (the "Series GG Shares"), and 650 shares to be designated the "Variable Cumulative Preferred Stock, Series HH" (the "Series HH Shares"). B. Not Applicable. -------------- With respect to the Series EE Shares, Series FF Shares, Series GG Shares and Series HH Shares the words "less than one (1) year" in the first sentence of Paragraph J of Section FOUR of subparagraph (c) of Article FOURTH shall be deleted and not apply. SECTION TWENTY-FOUR. Variable Cumulative Preferred Stock, Series II. A. Designation. ----------- There is hereby created one series of the Variable Cumulative Preferred Stock, consisting of 700 shares to be designated the "Variable Cumulative Preferred Stock, Series II" (the "Series II Shares"). B. Not Applicable. -------------- With respect to the Series II Shares the words "less than one (1) year" in the first sentence of Paragraph J of Section FOUR of subparagraph (c) of Article FOURTH shall be deleted and not apply. -35- SECTION TWENTY-FIVE. Variable Cumulative Preferred Stock, Series JJ; Variable Cumulative Preferred Stock, Series KK; and Variable Cumulative Preferred Stock, Series LL. A. Designation. ----------- There are hereby created three series of the Variable Cumulative Preferred Stock, consisting of 1,000 shares to be designated the "Variable Cumulative Preferred Stock, Series JJ" (the "Series JJ Shares"), 1,000 shares to be designated the "Variable Cumulative Preferred Stock, Series KK" (the "Series KK Shares"), and 1,000 shares to be designated the "Variable Cumulative Preferred Stock, Series LL" (the "Series LL Shares"). B. Not Applicable. -------------- With respect to the Series JJ Shares, Series KK Shares and Series LL Shares the words "less than one (1) year" in the first sentence of Paragraph J of Section FOUR of subparagraph (c) of Article FOURTH shall be deleted and not apply. SECTION TWENTY-SIX: Redemption Provisions of the Series H Shares, Series I Shares, Series J Shares, Series K Shares, Series L Shares, Series M Shares, Series N Shares, Series O Shares, Series P Shares, Series Q Shares, Series R Shares, Series S Shares, Series T Shares, Series U Shares, Series V Shares, Series W Shares, Series X Shares, Series X-1 Shares, Series Y Shares, Series Y-1 Shares, Series Z Shares, Series AA Shares, Series BB Shares, Series CC Shares, Series DD Shares, Series EE Shares, Series FF Shares, Series GG Shares, Series HH Shares, Series II Shares, Series JJ Shares, Series KK Shares and Series LL Shares. Notwithstanding the provisions of clause (ii) of paragraph A of SECTION EIGHT of subparagraph (c) of Article FOURTH, in the case of any Series H Shares, Series I Shares, Series J Shares, Series K Shares, Series L Shares, Series M Shares, Series N Shares, Series O Shares, Series P Shares, Series Q Shares, Series R Shares, Series S Shares, Series T Shares, Series U Shares, Series V Shares, Series W Shares, Series X Shares, Series X-1 Shares, Series Y Shares, Series Y-1 Shares, Series Z Shares, Series AA Shares, Series BB Shares, Series CC Shares, Series DD Shares, Series EE Shares, Series FF Shares, Series GG Shares, Series HH Shares, Series II Shares, Series JJ Shares, Series KK Shares, or Series LL Shares with a Dividend Period equal to or more than two (2) years, any redemption price determined by the corporation prior to the commencement of such Dividend Period shall not be less than One Hundred Thousand Dollars ($100,000) per share, plus an amount equal to accumulated and unpaid dividends to the date fixed for redemption. Notwithstanding the provision of paragraph A of SECTION EIGHT of subparagraph (c) of Article FOURTH, the corporation shall not be entitled to redeem the Series GG Shares until January 9, 2003 or the Series II Shares until July 15, 2008; thereafter, as applicable, redemption dates and -36- prices applicable to Subsequent Dividend Periods for the Series Z Shares, the Series GG Shares and the Series II Shares shall be as set forth in the notice to Holders with respect thereto. SECTION TWENTY-SEVEN: Auction Procedures for the Series O Shares, Series P Shares, Series Q Shares, Series R Shares, Series S Shares, Series T Shares, Series U Shares, Series V Shares, Series W Shares, Series X Shares, Series X-1 Shares, Series Y Shares, Series Y-1 Shares, Series Z Shares, Series AA Shares, Series BB Shares, Series CC Shares, Series DD Shares, Series EE Shares, Series FF Shares, Series GG Shares, Series HH Shares, Series II Shares, Series JJ Shares, Series KK Shares and Series LL Shares. Notwithstanding any provisions to the contrary contained in Article FOURTH of this Certificate of Incorporation, the Auction Method shall be the sole method for determining Dividend Periods and Dividends Rates for the Series O Shares, the Series P Shares, the Series Q Shares, Series R Shares, Series S Shares, Series T Shares, Series U Shares, Series V Shares, Series W Shares, Series X Shares, Series X-1 Shares, Series Y Shares, Series Y-1 Shares, Series Z Shares, Series AA Shares, Series BB Shares, Series CC Shares, Series DD Shares, Series EE Shares, Series FF Shares, Series GG Shares, Series HH Shares, Series II Shares, Series JJ Shares, Series KK Shares and Series LL Shares; accordingly, the following changes to Article FOURTH are hereby made with respect to each such series: SECTION ONE: (i) the definition of "Auction Stock", "Auction Stock Depository", "Available Auction Stock", and "Subject Auction Stock" are amended to "Stock", "Auction Depository", "Available Stock" and "Subject Stock" respectively; (ii) the definitions of "Converted Remarketed Stock", "Remarketed Stock", "Remarketing Agent", "Remarketing Depository", "Remarketing Method" and "Remarketing Procedures" are deleted; and (iii) the definition of "Dividend Determination Method" or "Method" is amended and restated to read in its entirety, "'Dividend Determination Method' or 'Method' shall mean the Auction Method". Each reference to any of the terms set forth in (i) or (iii) above as used throughout Article FOURTH of this Certificate of Incorporation shall be a reference to such terms as so amended or restated, respectively, and each reference to a term set forth in (ii) above shall be deleted. SECTION THREE: the words "either all" and "or all" appearing therein are deleted. SECTION FOUR: (i) the word "either" in the third sentence of paragraph B is deleted together with the remaining text of paragraph B from the sentence beginning with the words "Subject to"; (ii) paragraph E is deleted in its entirety; (iii) the word "or" appearing in paragraph F is deleted; and (iv) the words "and the" appearing in the first and last sentence of paragraph G are deleted. -37- SECTION SIX: the section is deleted in its entirety. SECTION SEVEN: (i) the words "or the" appearing in paragraph A are deleted; (ii) the remaining text of the first sentence of paragraph F following the word "Depository" is deleted; and (iii) the remaining text of the second sentence of paragraph F following the word "Depository" is deleted. SECTION TWENTY-EIGHT: Dividends Provisions of the Series A Shares, Series B Shares, Series C Shares, Series D Shares, Series E Shares, Series F Shares, Series G Shares, Series H Shares, Series I Shares, Series J Shares, Series K Shares, Series L Shares, Series M Shares, Series N Shares, Series O Shares, Series P Shares, Series Q Shares, Series R Shares, Series S Shares, Series T Shares, Series U Shares, Series V Shares, Series W Shares, Series X Shares, Series X-1 Shares, Series Y Shares, Series Y-1 Shares, Series Z Shares, Series AA Shares, Series BB Shares, Series CC Shares, Series DD Shares, Series EE Shares, Series FF Shares, Series GG Shares, Series HH Shares, Series II Shares, Series JJ Shares, Series KK Shares and Series LL Shares. A. Dividend Rates. -------------- The Dividend Rate for each of the Series A Shares, Series B Shares, Series C Shares, Series D Shares, Series E Shares, Series F Shares, Series G Shares, Series H Shares, Series I Shares, Series J Shares, Series K Shares, Series L Shares, Series M Shares, Series N Shares, Series O Shares, Series P Shares, Series Q Shares, Series R Shares, Series S Shares, Series T Shares, Series U Shares, Series V Shares, Series W Shares, Series X Shares, Series X-1 Shares, Series Y Shares, Series Y-1 Shares, Series Z Shares, Series AA Shares, Series BB Shares, Series CC Shares, Series DD Shares, Series EE Shares, Series FF Shares, Series GG Shares, Series HH Shares, Series II Shares, Series JJ Shares, Series KK Shares and Series LL Shares in effect on the effective time of the Merger (as defined in Subsection B of Section FOUR of this Article FOURTH) shall be the same dividend rate as existed for the related Corresponding Preferred Stock (as defined in Subsection B of Section FOUR of this Article FOURTH) immediately prior to the effective time of the Merger. B. Dividend Periods. ---------------- The Initial Dividend Period or the Subsequent Dividend Period, as the case may be, for each of the Series A Shares, Series B Shares, Series C Shares, Series D Shares, Series E Shares, Series F Shares, Series G Shares, Series H Shares, Series I Shares, Series J Shares, Series K Shares, Series L Shares, Series M Shares, Series N Shares, Series O Shares, Series P Shares, Series Q Shares, Series R Shares, Series S Shares, Series T Shares, Series U Shares, Series V Shares, Series W Shares, Series X Shares, Series X-1 Shares, Series Y Shares, Series Y-1 Shares, Series Z Shares, Series AA Shares, Series BB Shares, Series CC Shares, Series DD Shares, Series EE Shares, Series FF Shares, Series GG Shares, Series HH Shares, Series II Shares, Series JJ Shares, Series KK Shares and Series LL Shares in effect on the effective time of the Merger (as defined in Subsection B of Section FOUR of this Article FOURTH) shall be the same Initial Dividend Period or Subsequent -38- Dividend Period, as the case may be, as existed for the related Corresponding Preferred Stock (as defined in Subsection B of Section FOUR of this Article FOURTH) immediately prior to the effective time of the Merger. ARTICLE FIFTH: The term of existence of the corporation is to be perpetual. ARTICLE SIXTH: The number of its directors shall be determined in the manner provided in the by-laws of the corporation. ARTICLE SEVENTH: Unless and except to the extent that the by-laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot. ARTICLE EIGHTH: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the corporation is expressly authorized to make, alter and repeal the by-laws of the corporation, subject to the power of the stockholders of the corporation to alter or repeal any by-laws whether adopted by them or otherwise. ARTICLE NINTH: A director of the corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. Any amendment or modification or repeal of the foregoing sentence shall not adversely affect any right or protection of a director of the corporation hereunder in respect of any act or omission occurring prior to the time of such amendment, modification or repeal. -39- IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate of Incorporation this the 2nd day of July, 2001. GENERAL ELECTRIC CAPITAL CORPORATION /s/ Nancy Barton ------------------------------------ Name: Nancy Barton Title: Senior Vice President EX-4 4 gecc2001ex4h.txt Exhibit 4 (h) March 7, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Subject: General Electric Capital Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2001 - File No. 1-6461 Dear Sirs: Neither General Electric Capital Corporation (the "Corporation") nor any of its subsidiaries has outstanding any instrument with respect to its long-term debt that is not registered or filed with the Commission and under which the total amount of securities authorized exceeds 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. In accordance with paragraph (b) (4) (iii) of Item 601 of Regulation S-K (17 CFR ss.229.601),the Corporation hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of each instrument which defines the rights of holders of such long-term debt. Very truly yours, GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ J.A. Parke ------------------------- J.A. Parke, Vice Chairman and Chief Financial Officer EX-12 5 gecc2001ex12a.txt
Exhibit 12 (a) GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES Computation of Ratio of Earnings to Fixed Charges Years ended December 31 ----------------------------------------------------------------- (In millions) 2001 2000 1999 1998 1997 ------------- ------------ ------------- ------------ ----------- Net earnings ....................................$ 5,902 $ 4,289 $ 4,208 $ 3,374 $ 2,729 Provision for income taxes ...................... 1,734 1,555 1,553 1,185 997 Minority interest ............................... 84 86 68 49 40 ------------- ------------ ------------- ------------ ----------- Earnings before income taxes and minority interest ....................................... 7,720 5,930 5,829 4,608 3,766 ------------- ------------ ------------- ------------ ----------- Fixed charges: Interest ....................................... 10,261 10,763 9,183 8,772 7,440 One-third of rentals ........................... 324 381 345 289 240 ------------- ------------ ------------- ------------ ----------- Total fixed charges ............................. 10,585 11,144 9,528 9,061 7,680 ------------- ------------ ------------- ------------ ----------- Less interest capitalized, net of amortization .. (88) (121) (87) (88) (52) ------------- ------------ ------------- ------------ ----------- Earnings before income taxes and minority interest plus fixed charges ....................$ 18,217 $ 16,953 $ 15,270 $ 13,581 $ 11,394 ============= ============ ============= ============ =========== Ratio of earnings to fixed charges .............. 1.72 1.52 1.60 1.50 1.48 ============= ============ ============= ============ ===========
EX-12 6 gecc2001ex12b.txt
Exhibit 12 (b) GENERAL ELECTRIC CAPITAL CORPORATION AND CONSOLIDATED AFFILIATES Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Years ended December 31 ----------------------------------------------------------------- (In millions) 2001 2000 1999 1998 1997 ------------ ----------- ------------ ------------ ----------- Net earnings .................................... $ 5,902 $ 4,289 $ 4,208 $ 3,374 $ 2,729 Provision for income taxes ...................... 1,734 1,555 1,553 1,185 997 Minority interest ............................... 84 86 68 49 40 ------------ ----------- ------------ ------------ ----------- Earnings before income taxes and minority interest ....................................... 7,720 5,930 5,829 4,608 3,766 ------------ ----------- ------------ ------------ ----------- Fixed charges: Interest ...................................... 10,261 10,763 9,183 8,772 7,440 One-third of rentals .......................... 324 381 345 289 240 ------------ ----------- ------------ ------------ ----------- Total fixed charges ............................. 10,585 11,144 9,528 9,061 7,680 Less interest capitalized, net of amortization .. (88) (121) (87) (88) (52) ------------ ----------- ------------ ------------ ----------- Earnings before income taxes and minority interest plus fixed charges .................... $ 18,217 $ 16,953 $ 15,270 $ 13,581 $ 11,394 ============ =========== ============ ============ =========== Preferred stock dividend requirements ........... $ 80 $ 126 $ 115 $ 97 $ 78 Ratio of earnings before provision for income taxes to net earnings .......................... 1.29 1.36 1.37 1.35 1.37 ------------ ----------- ------------ ------------ ----------- Preferred stock dividend factor on pre-tax basis 103 171 157 131 107 Fixed charges ................................... 10,585 11,144 9,528 9,061 7,680 ------------ ----------- ------------ ------------ ----------- Total fixed charges and preferred stock dividend requirements ................................... $ 10,688 $ 11,315 $ 9,685 $ 9,192 $ 7,787 ============ =========== ============ ============ =========== Ratio of earnings to combined fixed charges and preferred stock dividends ...................... 1.70 1.50 1.58 1.48 1.46 ============ =========== ============ ============ ===========
EX-23 7 gecc2001ex23ii.txt Exhibit 23 (ii) To the Board of Directors General Electric Capital Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 33-43420, 333-22265, 333-59977, and 333-66560) on Form S-3 of General Electric Capital Corporation, and in the Registration Statement (No. 33-39596) on Form S-3 jointly filed by General Electric Capital Corporation and General Electric Company, of our report dated February 8, 2002, relating to the statement of financial position of General Electric Capital Corporation and consolidated affiliates as of December 31, 2001 and 2000, and the related statements of earnings, changes in share owners' equity and cash flows for each of the years in the three-year period ended December 31, 2001, and the related schedule, which report appears in the December 31, 2001 annual report on Form 10-K of General Electric Capital Corporation. /s/ KPMG LLP Stamford, Connecticut March 8, 2002 EX-24 8 gecc2001ex24.txt Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being directors and/or officers of General Electric Capital Corporation, a Delaware corporation (the "Corporation"), hereby constitutes and appoints Denis J. Nayden, James A. Parke, Joan C. Amble and Nancy E. Barton, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead in any and all capacities, to sign one or more Annual Reports for the Corporation's fiscal year ended December 31, 2001, on Form 10-K under the Securities Exchange Act of 1934, as amended, or such other form as such attorney-in-fact may deem necessary or desirable, any amendments thereto, and all additional amendments thereto in such form as they or any one of them may approve, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done to the end that such Annual Report or Annual Reports shall comply with the Securities Exchange Act of 1934, as amended, and the applicable Rules and Regulations of the Securities and Exchange Commission adopted or issued pursuant thereto, as fully and to all intents and purposes as he might or could in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his substitute or resubstitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand this 7th day of March 2002. /s/ Denis J. Nayden /s/ James A. Parke - ----------------------------- ------------------------------ Denis J. Nayden, James A. Parke, Chairman of the Board and Director, Vice Chairman and Chief Executive Officer Chief Financial Officer (Principal Executive Officer) (Principal Financial Officer) /s/ Joan C. Amble ----------------------------- Joan C. Amble, Vice President and Controller (Principal Accounting Officer) EX-99.B BYLAWS 9 gecc2001ex99b.txt F-1 ANNUAL REPORT PAGE 41 FINANCIAL SECTION CONTENTS AUDITED FINANCIAL STATEMENTS 42 Earnings 42 Changes in Share Owners' Equity 44 Financial Position 46 Cash Flows 67 Notes to Consolidated Financial Statements MANAGEMENT'S DISCUSSION 48 Operations 48 Consolidated Operations 50 Segment Operations 57 International Operations 58 Financial Resources and Liquidity 64 Critical Accounting Policies 64 Selected Financial Data 92 INDEPENDENT AUDITORS' REPORT MANAGEMENT'S DISCUSSION OF FINANCIAL RESPONSIBILITY Events of 2001 have stressed the world's economy and capital markets. At GE, having well informed, confident investors is a critical management objective. We take full responsibility for this objective, adopting appropriate accounting policies and devoting our full, unyielding commitment to ensuring that those policies are applied properly and consistently. We make every effort to report in a manner that is relevant, complete and understandable. We welcome and evaluate each suggestion from those who use our reports. Management meets its responsibility for this objective in the following ways: RIGOROUS MANAGEMENT OVERSIGHT. Members of our corporate leadership team review each of our businesses at least six times a year on matters ranging from overall strategy and financial performance to staffing and compliance. Our business leaders constantly monitor real-time financial and operating systems that enable early identification of, and responses to, opportunities and potential issues. Our Board of Directors oversees management's conduct of the business, and our Audit Committee, consisting entirely of outside directors, oversees the Company's internal system of financial controls. DEDICATION TO CONTROLLERSHIP. We maintain a dynamic system of internal financial controls designed to ensure accurate financial record-keeping, protection of physical and intellectual property and efficient use of resources. We recruit and retain a world-class financial team, including more than 450 internal auditors who conduct thousands of audits each year in every geographic area and every GE business. Senior management and the Audit Committee oversee the scope and results of these reviews. We continuously reinforce key employee responsibilities around the world through our integrity policies, which require compliance with law and policy, including financial integrity and avoiding conflicts of interest. These integrity policies, published in 27 languages, are provided to each of our more than 300,000 global employees. Our internal auditors conduct extensive inquiries into compliance with these policies. Our strong compliance culture requires employees to raise any concerns and prohibits retribution for doing so. We hold all employees, including top management, accountable for compliance with our integrity policies. VISIBILITY TO INVESTORS. As one of the most widely followed companies in the world, we are keenly aware of the importance of full and open presentation of our financial position and operating results. We hold more than 200 analyst and investor meetings every year and communicate all material information covered in those meetings to the public. Investors have given GE 16 first-place awards in the last five years as reported by INVESTOR RELATIONS magazine. We are in regular contact with representatives of the major rating agencies and our debt continues to receive their highest ratings. We welcome the strong oversight of our financial reporting by our independent audit firm, KPMG LLP, whose representatives have direct access to the Audit Committee. Their report for 2001 appears on page 92. Great companies are built on the foundation of accurate financial information and compliance with the law. The financial information in this report is an important part of that foundation. We present that information proudly, with the goal that those who use it will understand GE and share our confidence in its future. /s/ Jeffrey R. Immelt /s/ Keith S. Sherin Jeffrey R. Immelt Keith S. Sherin Chairman of the Board Senior Vice President, Finance, and Chief Executive Officer and Chief Financial Officer February 8, 2002 F-2 ANNUAL REPORT PAGE 42 STATEMENT OF EARNINGS
General Electric Company and consolidated affiliates ----------------------------------- For the years ended December 31 (In millions; per-share amounts in dollars) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- REVENUES Sales of goods $ 52,677 $ 54,828 $ 47,785 Sales of services 18,722 18,126 16,283 Other income (note 2) 234 436 798 Earnings of GECS before accounting changes -- -- -- GECS revenues from services (note 3) 54,280 56,463 46,764 ---------------------------------- Total revenues 125,913 129,853 111,630 ---------------------------------- COSTS AND EXPENSES (note 4) Cost of goods sold 35,678 39,312 34,554 Cost of services sold 13,419 12,511 11,404 Interest and other financial charges 11,062 11,720 10,013 Insurance losses and policyholder and annuity benefits 15,062 14,399 11,028 Provision for losses on financing receivables (note 13) 2,481 2,045 1,671 Other costs and expenses 28,162 30,993 27,018 Minority interest in net earnings of consolidated affiliates 348 427 365 ---------------------------------- Total costs and expenses 106,212 111,407 96,053 ---------------------------------- EARNINGS BEFORE INCOME TAXES AND ACCOUNTING CHANGES 19,701 18,446 15,577 Provision for income taxes (note 7) (5,573) (5,711) (4,860) ---------------------------------- EARNINGS BEFORE ACCOUNTING CHANGES 14,128 12,735 10,717 Cumulative effect of accounting changes (note 1) (444) -- -- ---------------------------------- NET EARNINGS $ 13,684 $ 12,735 $ 10,717 ================================================================================================================= PER-SHARE AMOUNTS (note 8) Per-share amounts before accounting changes Diluted earnings per share $ 1.41 $ 1.27 $ 1.07 Basic earnings per share $ 1.42 $ 1.29 $ 1.09 Per-share amounts after accounting changes Diluted earnings per share $ 1.37 $ 1.27 $ 1.07 Basic earnings per share $ 1.38 $ 1.29 $ 1.09 ================================================================================================================= DIVIDENDS DECLARED PER SHARE $ 0.66 $ 0.57 $ 0.48 2/3 =================================================================================================================
CONSOLIDATED STATEMENT OF CHANGES IN SHARE OWNERS' EQUITY
(In millions) 2001 2000 1999 - -------------------------------------------------------------------------------------------- CHANGES IN SHARE OWNERS' EQUITY (note 24) Balance at January 1 $ 50,492 $ 42,557 $ 38,880 ------------------------------ Dividends and other transactions with share owners (7,529) (3,044) (4,632) ------------------------------ Changes other than transactions with share owners Increase attributable to net earnings 13,684 12,735 10,717 Investment securities--net (306) (552) (1,776) Currency translation adjustments (562) (1,204) (632) Derivatives qualifying as hedges (955) -- -- ------------------------------ Total changes other than transactions with share owners 11,861 10,979 8,309 ------------------------------ Balance at December 31 $ 54,824 $ 50,492 $ 42,557 ============================================================================================ The notes to consolidated financial statements on pages 67-92 are an integral part of these statements.
F-3 ANNUAL REPORT PAGE 43 STATEMENT OF EARNINGS (CONT)
GE GECS For the years ended December 31 (In millions; ---------------------------- ---------------------------- per-share amounts in dollars) 2001 2000 1999 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- REVENUES Sales of goods $ 49,057 $ 45,427 $ 39,045 $ 3,627 $ 9,408 $ 8,740 Sales of services 18,961 18,380 16,600 -- -- -- Other income (note 2) 433 498 856 -- -- -- Earnings of GECS before accounting changes 5,586 5,192 4,443 -- -- -- GECS revenues from services (note 3) -- -- -- 54,726 56,769 47,009 ---------------------------- ---------------------------- Total revenues 74,037 69,497 60,944 58,353 66,177 55,749 ---------------------------- ---------------------------- COSTS AND EXPENSES (note 4) Cost of goods sold 32,419 30,782 26,578 3,266 8,537 7,976 Cost of services sold 13,658 12,765 11,721 -- -- -- Interest and other financial charges 817 811 810 10,598 11,111 9,359 Insurance losses and policyholder and annuity benefits -- -- -- 15,062 14,399 11,028 Provision for losses on financing receivables (note 13) -- -- -- 2,481 2,045 1,671 Other costs and expenses 8,637 8,392 7,732 19,817 22,767 19,433 Minority interest in net earnings of consolidated affiliates 185 213 179 163 214 186 ---------------------------- ---------------------------- Total costs and expenses 55,716 52,963 47,020 51,387 59,073 49,653 ---------------------------- ---------------------------- EARNINGS BEFORE INCOME TAXES AND ACCOUNTING CHANGES 18,321 16,534 13,924 6,966 7,104 6,096 Provision for income taxes (note 7) (4,193) (3,799) (3,207) (1,380) (1,912) (1,653) ---------------------------- ---------------------------- EARNINGS BEFORE ACCOUNTING CHANGES 14,128 12,735 10,717 5,586 5,192 4,443 Cumulative effect of accounting changes (note 1) (444) -- -- (169) -- -- ---------------------------- ---------------------------- NET EARNINGS $ 13,684 $ 12,735 $ 10,717 $ 5,417 $ 5,192 $ 4,443 ========================================================================================================================== In the consolidating data on this page, "GE" means the basis of consolidation as described in note 1 to the consolidated financial statements; "GECS" means General Electric Capital Services, Inc. and all of its affiliates and associated companies. Transactions between GE and GECS have been eliminated from the "General Electric Company and consolidated affiliates" columns on page 42.
F-4 ANNUAL REPORT PAGE 44 STATEMENT OF FINANCIAL POSITION
General Electric Company and consolidated affiliates --------------------------- At December 31 (In millions) 2001 2000 - ------------------------------------------------------------------------------------------ ASSETS Cash and equivalents $ 9,082 $ 8,195 Investment securities (note 9) 101,017 91,339 Current receivables (note 10) 9,590 9,502 Inventories (note 11) 8,565 7,812 Financing receivables (investments in time sales, loans and financing leases)--net (notes 12 and 13) 174,032 143,299 Insurance receivables (note 14) 27,317 23,802 Other GECS receivables 11,105 11,714 Property, plant and equipment (including equipment leased to others)--net (note 15) 42,140 40,015 Investment in GECS -- -- Intangible assets--net (note 16) 31,649 27,441 All other assets (note 17) 80,526 73,887 ------------------------ TOTAL ASSETS $ 495,023 $ 437,006 ========================================================================================== LIABILITIES AND EQUITY Short-term borrowings (note 18) $ 153,076 $ 119,180 Accounts payable, principally trade accounts 18,158 14,853 Progress collections and price adjustments accrued 11,751 8,271 Dividends payable 1,787 1,589 All other current costs and expenses accrued 14,132 12,219 Long-term borrowings (note 18) 79,806 82,132 Insurance liabilities, reserves and annuity benefits (note 19) 114,223 106,150 All other liabilities (note 20) 32,921 28,494 Deferred income taxes (note 21) 9,130 8,690 ------------------------ Total liabilities 434,984 381,578 ------------------------ Minority interest in equity of consolidated affiliates (note 22) 5,215 4,936 ------------------------ Common stock (9,925,938,000 and 9,932,006,000 shares outstanding at year-end 2001 and 2000, respectively) 669 669 Accumulated gains/(losses)--net Investment securities (232) 74 Currency translation adjustments (3,136) (2,574) Derivatives qualifying as hedges (955) -- Other capital 16,693 15,195 Retained earnings 68,701 61,572 Less common stock held in treasury (26,916) (24,444) ------------------------ Total share owners' equity (notes 24 and 25) 54,824 50,492 ------------------------ TOTAL LIABILITIES AND EQUITY $ 495,023 $ 437,006 ========================================================================================== The sum of accumulated gains/(losses) on investment securities, currency translation adjustments, and derivatives qualifying as hedges constitutes "Accumulated nonowner changes other than earnings," as shown in note 24, and was $(4,323) and $(2,500) at year-end 2001 and 2000, respectively. The notes to consolidated financial statements on pages 67-92 are an integral part of this statement.
F-5 ANNUAL REPORT PAGE 45 STATEMENT OF FINANCIAL POSITION (CONT)
GE GECS --------------------- --------------------- At December 31 (In millions) 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and equivalents $ 10,447 $ 7,210 $ 7,314 $ 6,052 Investment securities (note 9) 879 1,009 100,138 90,330 Current receivables (note 10) 9,805 9,727 -- -- Inventories (note 11) 8,295 7,146 270 666 Financing receivables (investments in time sales, loans and financing leases)--net (notes 12 and 13) -- -- 174,032 143,299 Insurance receivables (note 14) -- -- 27,317 23,802 Other GECS receivables -- -- 13,267 13,288 Property, plant and equipment (including equipment leased to others)--net (note 15) 12,799 12,199 29,341 27,816 Investment in GECS 28,590 23,022 -- -- Intangible assets--net (note 16) 12,932 12,424 18,717 15,017 All other assets (note 17) 25,986 24,028 55,088 50,366 --------------------- --------------------- TOTAL ASSETS $ 109,733 $ 96,765 $ 425,484 $ 370,636 ============================================================================================================== LIABILITIES AND EQUITY Short-term borrowings (note 18) $ 1,722 $ 940 $ 160,844 $ 123,992 Accounts payable, principally trade accounts 6,680 6,153 13,705 10,436 Progress collections and price adjustments accrued 11,751 8,271 -- -- Dividends payable 1,787 1,589 -- -- All other current costs and expenses accrued 14,132 12,219 -- -- Long-term borrowings (note 18) 787 841 79,091 81,379 Insurance liabilities, reserves and annuity benefits (note 19) -- -- 114,223 106,150 All other liabilities (note 20) 16,089 14,840 16,647 13,451 Deferred income taxes (note 21) 1,013 452 8,117 8,238 --------------------- --------------------- Total liabilities 53,961 45,305 392,627 343,646 --------------------- --------------------- Minority interest in equity of consolidated affiliates (note 22) 948 968 4,267 3,968 --------------------- --------------------- Common stock (9,925,938,000 and 9,932,006,000 shares outstanding at year-end 2001 and 2000, respectively) 669 669 1 1 Accumulated gains/(losses)--net Investment securities (232) 74 (348) 4 Currency translation adjustments (3,136) (2,574) (840) (957) Derivatives qualifying as hedges (955) -- (890) -- Other capital 16,693 15,195 5,989 2,752 Retained earnings 68,701 61,572 24,678 21,222 Less common stock held in treasury (26,916) (24,444) -- -- --------------------- --------------------- Total share owners' equity (notes 24 and 25) 54,824 50,492 28,590 23,022 --------------------- --------------------- TOTAL LIABILITIES AND EQUITY $ 109,733 $ 96,765 $ 425,484 $ 370,636 ============================================================================================================== In the consolidating data on this page, "GE" means the basis of consolidation as described in note 1 to the consolidated financial statements; "GECS" means General Electric Capital Services, Inc. and all of its affiliates and associated companies. Transactions between GE and GECS have been eliminated from the "General Electric Company and consolidated affiliates" columns on page 44.
F-6 ANNUAL REPORT PAGE 46 STATEMENT OF CASH FLOWS
General Electric Company and consolidated affiliates ------------------------------ For the years ended December 31 (In millions) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- CASH FLOWS--OPERATING ACTIVITIES Net earnings $ 13,684 $ 12,735 $ 10,717 Adjustments to reconcile net earnings to cash provided from operating activities Cumulative effect of accounting changes 444 -- -- Depreciation and amortization of property, plant and equipment 5,370 5,039 4,908 Amortization of goodwill and other intangibles 1,719 2,697 1,783 Earnings (before accounting changes) retained by GECS -- -- -- Deferred income taxes 1,426 1,153 1,502 Decrease (increase) in GE current receivables 197 (537) 143 Decrease (increase) in inventories (485) (924) 266 Increase in accounts payable 4,676 3,297 820 Increase (decrease) in insurance liabilities and reserves 8,194 (1,009) 4,584 Provision for losses on financing receivables 2,481 2,045 1,671 All other operating activities (5,511) (1,806) (1,801) ------------------------------ CASH FROM OPERATING ACTIVITIES 32,195 22,690 24,593 ------------------------------ CASH FLOWS--INVESTING ACTIVITIES Additions to property, plant and equipment (15,520) (13,967) (15,502) Dispositions of property, plant and equipment 7,345 6,767 6,262 Net increase in GECS financing receivables (13,952) (16,076) (12,628) Payments for principal businesses purchased (12,429) (2,332) (11,654) All other investing activities (5,558) (12,091) (8,657) ------------------------------ CASH USED FOR INVESTING ACTIVITIES (40,114) (37,699) (42,179) ------------------------------ CASH FLOWS--FINANCING ACTIVITIES Net increase (decrease) in borrowings (maturities of 90 days or less) 20,482 (8,243) 6,171 Newly issued debt (maturities longer than 90 days) 32,071 47,645 48,158 Repayments and other reductions (maturities longer than 90 days) (37,001) (32,762) (27,539) Net dispositions (purchases) of GE shares for treasury (2,435) 469 (1,002) Dividends paid to share owners (6,358) (5,401) (4,587) All other financing activities 2,047 12,942 622 ------------------------------ CASH FROM (USED FOR) FINANCING ACTIVITIES 8,806 14,650 21,823 ------------------------------ INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 887 (359) 4,237 Cash and equivalents at beginning of year 8,195 8,554 4,317 ------------------------------ Cash and equivalents at end of year $ 9,082 $ 8,195 $ 8,554 ===================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid during the year for interest $(11,125) $(11,617) $(10,078) Cash recovered (paid) during the year for income taxes (1,487) (2,604) (1,597) ===================================================================================================== The notes to consolidated financial statements on pages 67-92 are an integral part of this statement.
F-7 ANNUAL REPORT PAGE 47 STATEMENT OF CASH FLOWS (CONT)
GE GECS ----------------------------- ------------------------------- For the years ended December 31 (In millions) 2001 2000 1999 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS--OPERATING ACTIVITIES Net earnings $ 13,684 $ 12,735 $ 10,717 $ 5,417 $ 5,192 $ 4,443 Adjustments to reconcile net earnings to cash provided from operating activities Cumulative effect of accounting changes 444 -- -- 169 -- -- Depreciation and amortization of property, plant and equipment 1,919 1,725 1,735 3,451 3,314 3,173 Amortization of goodwill and other intangibles 580 523 584 1,139 2,174 1,199 Earnings (before accounting changes) retained by GECS (3,625) (3,370) (2,777) -- -- -- Deferred income taxes 564 470 655 862 683 847 Decrease (increase) in GE current receivables 207 (550) 190 -- -- -- Decrease (increase) in inventories (881) (663) (61) 396 (261) 327 Increase in accounts payable 364 845 104 4,804 3,047 699 Increase (decrease) in insurance liabilities and reserves -- -- -- 8,194 (1,009) 4,584 Provision for losses on financing receivables -- -- -- 2,481 2,045 1,671 All other operating activities 3,941 3,701 616 (9,314) (5,901) (2,124) ----------------------------- ------------------------------- CASH FROM OPERATING ACTIVITIES 17,197 15,416 11,763 17,599 9,284 14,819 ----------------------------- ------------------------------- CASH FLOWS--INVESTING ACTIVITIES Additions to property, plant and equipment (2,876) (2,536) (2,036) (12,644) (11,431) (13,466) Dispositions of property, plant and equipment -- 53 -- 7,345 6,714 6,262 Net increase in GECS financing receivables -- -- -- (13,952) (16,076) (12,628) Payments for principal businesses purchased (1,436) (1,156) (1,594) (10,993) (1,176) (10,060) All other investing activities (1,535) (234) (432) (7,557) (12,173) (8,283) ----------------------------- ------------------------------- CASH USED FOR INVESTING ACTIVITIES (5,847) (3,873) (4,062) (37,801) (34,142) (38,175) ----------------------------- ------------------------------- CASH FLOWS--FINANCING ACTIVITIES Net increase (decrease) in borrowings (maturities of 90 days or less) 327 (1,331) (1,230) 23,634 (2,121) 7,308 Newly issued debt (maturities longer than 90 days) 1,303 785 558 30,752 46,887 47,605 Repayments and other reductions (maturities longer than 90 days) (950) (855) (615) (36,051) (31,907) (26,924) Net dispositions (purchases) of GE shares for treasury (2,435) 469 (1,002) -- -- -- Dividends paid to share owners (6,358) (5,401) (4,587) (1,961) (1,822) (1,666) All other financing activities -- -- -- 5,090 12,942 622 ----------------------------- ------------------------------- CASH FROM (USED FOR) FINANCING ACTIVITIES (8,113) (6,333) (6,876) 21,464 23,979 26,945 ----------------------------- ------------------------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 3,237 5,210 825 1,262 (879) 3,589 Cash and equivalents at beginning of year 7,210 2,000 1,175 6,052 6,931 3,342 ----------------------------- ------------------------------- Cash and equivalents at end of year $ 10,447 $ 7,210 $ 2,000 $ 7,314 $ 6,052 $ 6,931 ==================================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid during the year for interest $ (358) $ (388) $ (482) $(10,767) $(11,229) $ (9,596) Cash recovered (paid) during the year for income taxes (1,616) (1,804) (1,246) 129 (800) (351) ==================================================================================================================================== In the consolidating data on this page, "GE" means the basis of consolidation as described in note 1 to the consolidated financial statements; "GECS" means General Electric Capital Services, Inc. and all of its affiliates and associated companies. Transactions between GE and GECS have been eliminated from the "General Electric Company and consolidated affiliates" columns on page 46.
F-8 ANNUAL REPORT PAGE 48 MANAGEMENT'S DISCUSSION AND ANALYSIS MANAGEMENT'S DISCUSSION OF OPERATIONS OVERVIEW General Electric Company's consolidated financial statements represent the combination of manufacturing and nonfinancial services businesses of General Electric Company (GE) and the accounts of General Electric Capital Services, Inc. (GECS). Management's Discussion of Operations is presented in three parts: Consolidated Operations, Segment Operations and International Operations. CONSOLIDATED OPERATIONS General Electric Company achieved record earnings and cash generation in 2001, demonstrating the benefits of its diverse business portfolio and continuing emphasis on globalization, growth in services, Digitization and Six Sigma Quality. Revenues were $125.9 billion in 2001, a decrease of 3% from $129.9 billion in 2000, reflecting a 6% increase in GE's industrial business revenues partially offsetting a 12% decrease at GECS. As described on page 53, GECS revenues in both years included the revenues of certain businesses significantly impacted by strategic repositioning activities. Excluding such activities, consolidated revenues increased 4%. Revenues in 2000 increased 16% from $111.6 billion in 1999, reflecting continued growth from global activities and services. Earnings before accounting changes increased to a record $14,128 million in 2001, an 11% increase from $12,735 million in 2000. Per-share earnings before accounting changes increased to $1.41 during 2001, up 11% from the prior year's $1.27. (Except as otherwise noted, earnings per share are presented on a diluted basis.) The cumulative effect of accounting changes related to the adoption, as of January 1, 2001, of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, and the consensus of the FASB's Emerging Issues Task Force on Issue 99-20, RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS. Adoption of these standards resulted in a one-time, non-cash reduction of earnings of $444 million ($0.04 per share). After these required accounting changes, 2001 earnings and earnings per share were $13,684 million and $1.37, respectively. Earnings and earnings per share in 2000 rose 19% from $10,717 million and $1.07, respectively, in 1999. MAJOR PROVISIONS OF NEW ACCOUNTING STANDARDS that may be significant to GE's financial statements in the future are described in the following paragraphs. SFAS 141, BUSINESS COMBINATIONS, and SFAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS, modify the accounting for business combinations, goodwill and identifiable intangible assets. As of January 1, 2002, all goodwill and indefinite-lived intangible assets must be tested for impairment and a transition adjustment will be recognized. Management has not yet determined the exact amount of goodwill impairment under these new standards, but believes the non-cash transition charge to earnings will be approximately $1.0 billion ($0.10 per share) and recognized in the first quarter of 2002. Amortization of goodwill will cease as of January 1, 2002, and, thereafter, all goodwill and any indefinite-lived intangible assets must be tested at least annually for impairment. The effect of the non-amortization provisions on 2002 operations will be affected by 2002 acquisitions and cannot be forecast, but if these rules had applied to goodwill in 2001, management believes that full-year 2001 net earnings would have increased by approximately $1.1 billion ($0.11 per share). SFAS 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, requires recognition of the fair value of obligations associated with the retirement of long-lived assets when there is a legal obligation to incur such costs. This amount is accounted for like an additional element of the corresponding asset's cost, and is depreciated over that asset's useful life. SFAS 143 will be effective for GE on January 1, 2003. Management has not yet determined the effect of adopting this standard on GE's financial position and results of operations. DIVIDENDS DECLARED in 2001 amounted to $6,555 million. Per-share dividends of $0.66 were up 16% from 2000, following a 17% increase from the preceding year. GE has rewarded its share owners with 26 consecutive years of dividend growth. GE's dividend growth for the past five years has significantly outpaced dividend growth of companies in the Standard & Poor's 500 stock index. [GRAPH HERE] - -------------------------------------------------------------------------------- GE/S&P CUMULATIVE DIVIDEND GROWTH SINCE 1996 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- GE 12.84% 30.87% 53.49% 81.18% 109.66% S&P 500 4.03 8.72 11.68 12.08 5.64 - -------------------------------------------------------------------------------- RETURN ON AVERAGE SHARE OWNERS' EQUITY was 27.1% (excluding the effect of accounting changes) in 2001, about the same as in 2000. The 2000 return on average share owners' equity improved from 26.8% in 1999. Except as otherwise noted, the analysis in the remainder of this section presents GE results with GECS reported on an equity basis. GE TOTAL REVENUES were $74.0 billion in 2001, compared with $69.5 billion in 2000 and $60.9 billion in 1999. o GE sales of goods and services were $68.0 billion in 2001, an increase of 7% from 2000, which in turn was 15% higher than in 1999. Volume was about 7% higher in 2001, reflecting strong double-digit increases at Power Systems and Medical Systems, somewhat offset by decreases across most of the short-cycle businesses, particularly NBC, Plastics and Specialty F-9 ANNUAL REPORT PAGE 49 Materials. While overall selling prices were essentially flat in 2001, the effects of selling prices in various reporting segments differed markedly. The net effect in 2001 of exchange rates on sales denominated in currencies other than the U.S. dollar was slightly negative. Volume in 2000 was about 16% higher than in 1999, with selling price and currency effects both slightly negative. For purposes of the financial statement display of sales and costs of sales on pages 42 and 43, "goods" is required by U.S. Securities and Exchange Commission regulations to include all sales of tangible products, and "services" must include all other sales, including broadcasting and information services activities. GE sales of both spare parts (goods) and repair services, referred to here by management as "product services revenues," constitute an important part of operations. Sales of product services were $18.8 billion in 2001, a 13% increase over 2000. Increases in product services revenues in 2001 and 2000 were widespread, led by continued strong growth at Power Systems, Medical Systems and Transportation Systems. Operating margin from product services was approximately $4.7 billion, up 17% from 2000 on a comparable basis. The increase reflected improvements in most product services businesses and was led by Power Systems and Medical Systems. o GE other income, earned from a wide variety of sources, was $0.4 billion in 2001, $0.5 billion in 2000 and $0.9 billion in 1999. Other income in 1999 included a pre-tax gain of $0.4 billion resulting from the contribution of certain of NBC's media properties to NBC Internet (NBCi), a former publicly-traded company, in exchange for a noncontrolling interest in NBCi. o Earnings of GECS before accounting changes were $5,586 million, up 8% in 2001, following a 17% increase the year before. See page 53 for an analysis of these earnings. PRINCIPAL COSTS AND EXPENSES for GE are those classified as costs of goods and services sold, and selling, general and administrative expenses. Several GE initiatives had significant effects on costs: o The Six Sigma Quality initiative has lowered GE's costs by reducing rework, simplifying processes and reducing direct material costs. o Globalization has reduced costs through sourcing of products and services in lower-cost countries. o Digitization has also reduced costs by providing GE businesses the ability to simplify and streamline processes, while investing in internal infrastructure hardware and software, enabling them to conduct a growing portion of their business over the Internet. Benefits from this initiative include improved customer service, expanded product and service offerings and increased operating efficiency for both GE and its customers. Primarily because of the funding status of the GE Pension Plan and other retiree benefit plans, principal U.S. postretirement benefit plans (the plans) contributed $1,480 million, $1,266 million and $1,062 million to pre-tax earnings (6.8%, 6.5% and 6.5% of earnings before accounting changes) in 2001, 2000 and 1999, respectively. See notes 5 and 6 for information about funding status and actuarial assumptions of the plans. Postretirement benefit costs are expected to increase in 2002 for a number of reasons, including reduction in the assumed annual return on assets from 9.5% to 8.5%, reduction in the discount rate from 7.5% to 7.25% and effects of increases in healthcare costs. In 2002, management expects these plans to contribute approximately $700 million to pre-tax earnings. This estimate will not affect the funding status of the GE Pension Plan; management does not anticipate GE making contributions to that Plan. The present funding status of the plans provides assurance of benefits for GE plan participants, but future effects on operating results and funding depend on economic conditions and investment performance. Costs and expenses in 1999 included $326 million of unusual charges, the largest of which resulted from liabilities associated with past activities at former manufacturing sites that are not part of any current business segment, and costs for rationalizing certain operations and facilities of the worldwide industrial businesses. Major elements of the restructuring program included costs for employee severance, lease termination, dismantlement and site restoration. The program was essentially complete by the end of 2000. [GRAPH HERE] - -------------------------------------------------------------------------------- GE OPERATING MARGIN AS A PERCENTAGE OF SALES 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- As reported 11.0% 16.7% 17.3% 18.6% 19.6% Restructuring and other unusual charges 4.7 -- 0.5 0.3 -- - -------------------------------------------------------------------------------- OPERATING MARGIN is sales of goods and services less the costs of goods and services sold, and selling, general and administrative expenses. GE operating margin reached a record 19.6% of sales in 2001, up from a comparable 18.9% in 2000 and 17.8% in 1999. The continued improvement in operating margin in 2001 was led by Power Systems and Aircraft Engines, reflecting increasing benefits from the Digitization, product services and Six Sigma Quality initiatives. Reported operating margin was 18.6% in 2000, including the costs of a one-time retirement benefit provision associated with the labor agreement concluded in the third quarter of that year. Reported operating margin in 1999 was 17.3% of sales, including the $326 million of unusual charges discussed in the preceding paragraph. F-10 ANNUAL REPORT PAGE 50 TOTAL COST PRODUCTIVITY (sales in relation to costs, both on a constant dollar basis) in 2001 was 2.2% as productivity in long-cycle businesses, particularly Power Systems and Medical Systems, was partially offset by negative productivity across several short-cycle businesses, particularly Plastics, reflecting volume declines. In 2000, total cost productivity of 3.6% reflected benefits from improvements in base cost productivity achieved through strong volume growth and the Digitization and Six Sigma Quality initiatives. GE INTEREST AND OTHER FINANCIAL CHARGES in 2001 amounted to $817 million, about the same as 2000 and 1999. During 2001, the benefits of lower average interest rates and lower average borrowing levels were partially offset by increased provisions for interest on tax liabilities. During 2000, higher average interest rates were more than offset by lower average borrowing levels. INCOME TAXES on consolidated earnings before accounting changes were 28.3%, compared with 31.0% in 2000 and 31.2% in 1999. A more detailed analysis of differences between the U.S. federal statutory rate and the consolidated rate, as well as other information about income tax provisions, is provided in note 7. The effective tax rate of GECS decreased to 19.8% in 2001 from 26.9% in 2000 and 27.1% in 1999. The 2001 effective tax rate reflects the effects of continuing globalization, certain transactions (see note 7), and the effect of a pre-tax charge related to the events of September 11. The pre-tax charge related to September 11 amounted to approximately $600 million, principally at Specialty Insurance, and reduced the GECS effective tax rate by one percentage point. Management expects that trends in GECS businesses, particularly the continuing impact of globalization, are likely to result in an effective tax rate for GECS in 2002 that will be lower than the 2000 and 1999 rates, but higher than the 2001 rate. SEGMENT OPERATIONS REVENUES AND SEGMENT PROFIT FOR OPERATING SEGMENTS are shown on page 51. For additional information, including a description of the products and services included in each segment, see note 27. AIRCRAFT ENGINES reported a 6% increase in revenues in 2001, reflecting higher volume in services, and sales of commercial engines and aero-derivative products. Operating profit was 6% higher primarily as a result of volume growth and productivity. Product services revenues following the events of September 11 have been adversely affected by reduced customer flight hours and servicing requirements. Operating profit in 2000 increased 17% on revenues that were slightly higher than in 1999. The improvement in operating profit reflected strong productivity. In 2001, revenues from sales to the U.S. government were $1.9 billion compared with $1.6 billion in 2000. Aircraft Engines received orders of $12.1 billion in 2001 compared with $13.5 billion in 2000. The $11.2 billion total backlog at year-end 2001 comprised unfilled product orders of $9.4 billion (of which 56% was scheduled for delivery in 2002) and product services orders of $1.8 billion scheduled for 2002 delivery. Comparable December 31, 2000, total backlog was $12.0 billion. Management believes the events of September 11 will continue to adversely affect the airline industry in 2002 with implications for existing backlog, engine servicing revenue and future new engine orders. APPLIANCES revenues were 1% lower than a year ago, as continued price erosion offset modest market share gains. Operating profit decreased by 6%, largely as a result of lower selling prices and increased program spending on new products, which more than offset the benefits of productivity. Revenues in 2000 were 4% higher than in 1999, as volume increases more than offset lower selling prices. Operating profit also increased 4% in 2000, largely as a result of productivity and higher volume from new products. INDUSTRIAL PRODUCTS AND SYSTEMS (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Industrial Systems $ 4,440 $ 4,469 $4,333 Lighting 2,550 2,739 2,757 Transportation Systems 2,355 2,263 2,358 GE Supply 2,302 2,159 1,951 -------------------------- Total revenues $11,647 $11,630 $11,399 ========================== OPERATING PROFIT Industrial Systems $ 795 $ 839 $ 760 Lighting 405 593 640 Transportation Systems 497 540 525 GE Supply 146 123 96 -------------------------- Total operating profit $ 1,843 $ 2,095 $2,021 ======================================================== INDUSTRIAL PRODUCTS AND SYSTEMS revenues in 2001 were relatively unchanged from 2000 levels, as higher product services revenues at Transportation Systems, including acquisitions, more than offset selling price decreases across the segment and lower volume at Industrial Systems. Operating profit decreased 12% primarily as a result of the decline in selling prices and cost inflation. Revenues rose 2% in 2000, largely as a result of volume increases at Industrial Systems and growth in product services, including acquisitions, which more than offset lower selling prices. Operating profit increased 4%, primarily reflecting productivity and growth in product services. Transportation Systems received orders of $2.6 billion in 2001, compared with $2.1 billion in 2000. The $1.7 billion total backlog at year-end 2001 comprised unfilled product orders of $1.2 billion (of which 51% was scheduled for delivery in 2002) and product services orders of $0.5 billion scheduled for 2002 delivery. Comparable December 31, 2000, total backlog was $1.4 billion. F-11 ANNUAL REPORT PAGE 51 SUMMARY OF OPERATING SEGMENTS
General Electric Company and consolidated affiliates ---------------------------------------------------------- For the years ended December 31 (In millions) 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- REVENUES GE Aircraft Engines $ 11,389 $ 10,779 $ 10,730 $ 10,294 $ 7,799 Appliances 5,810 5,887 5,671 5,619 5,801 Industrial Products and Systems 11,647 11,630 11,399 11,078 10,763 Materials 7,069 8,020 7,118 6,796 6,934 NBC 5,769 6,797 5,790 5,269 5,153 Power Systems 20,211 14,861 10,099 8,500 7,986 Technical Products and Services 9,011 7,915 6,863 5,323 4,861 Eliminations (2,900) (2,101) (1,788) (1,420) (1,265) ---------------------------------------------------------- Total GE segment revenues 68,006 63,788 55,882 51,459 48,032 Corporate items (a) 445 517 619 771 3,227 Earnings of GECS before accounting changes 5,586 5,192 4,443 3,796 3,256 ---------------------------------------------------------- Total GE revenues 74,037 69,497 60,944 56,026 54,515 GECS segment revenues 58,353 66,177 55,749 48,694 39,931 Eliminations (b) (6,477) (5,821) (5,063) (4,251) (3,606) ---------------------------------------------------------- CONSOLIDATED REVENUES $ 125,913 $ 129,853 $ 111,630 $ 100,469 $ 90,840 ========================================================================================================= SEGMENT PROFIT GE Aircraft Engines $ 2,609 $ 2,464 $ 2,104 $ 1,769 $ 1,366 Appliances 643 684 655 755 771 Industrial Products and Systems 1,843 2,095 2,021 1,815 1,662 Materials 1,596 2,015 1,725 1,649 1,627 NBC 1,602 1,797 1,576 1,349 1,216 Power Systems 5,182 2,809 1,753 1,338 1,275 Technical Products and Services 1,970 1,718 1,359 1,109 988 ---------------------------------------------------------- Total GE operating profit 15,445 13,582 11,193 9,784 8,905 Earnings of GECS before accounting changes 5,586 5,192 4,443 3,796 3,256 ---------------------------------------------------------- Total segment profit 21,031 18,774 15,636 13,580 12,161 Corporate items and eliminations (c) (d) (1,893) (1,429) (902) (584) (1,351) GE interest and other financial charges (817) (811) (810) (883) (797) GE provision for income taxes (4,193) (3,799) (3,207) (2,817) (1,810) ---------------------------------------------------------- Earnings before accounting changes 14,128 12,735 10,717 9,296 8,203 ---------------------------------------------------------- Cumulative effect of accounting changes (444) -- -- -- -- ---------------------------------------------------------- CONSOLIDATED NET EARNINGS $ 13,684 $ 12,735 $ 10,717 $ 9,296 $ 8,203 ========================================================================================================= The notes to consolidated financial statements on pages 67-92 are an integral part of this statement. "GE" means the basis of consolidation as described in note 1 to the consolidated financial statements; "GECS" means General Electric Capital Services, Inc. and all of its affiliates and associated companies. The segment profit measure for GE industrial businesses is operating profit (earnings before interest and other financial charges, income taxes and accounting changes). The segment profit measure for GECS is after-tax earnings before accounting changes, reflecting the importance of financing and tax considerations to its operating activities. (a) Includes revenues of $944 million in 1997 from an appliance distribution affiliate that was deconsolidated in 1998. Also includes $1,538 million gain in 1997 from an exchange of preferred stock in Lockheed Martin Corporation for the stock of a newly formed subsidiary. (b) Principally the elimination of GECS earnings before accounting changes. (c) Includes income, principally from licensing activities, of $88 million, $79 million, $62 million, $271 million and $310 million in 2001, 2000, 1999, 1998 and 1997, respectively. (d) 1999 includes unusual charges amounting to $265 million. Of the total, amounts that relate to activities of GE operating segments were as follows: Aircraft Engines--$42 million, Appliances--$75 million, Industrial Products and Systems--$12 million, Materials--$13 million and Technical Products and Services--$34 million. 1997 includes unusual charges of $2,322 million. Of the total, amounts that relate to activities of GE operating segments were as follows: Aircraft Engines--$342 million, Appliances--$330 million, Industrial Products and Systems--$352 million, Materials--$63 million, NBC--$161 million, Power Systems--$437 million and Technical Products and Services--$157 million. Also included in 1997 is a $1,538 million gain associated with the Lockheed Martin Corporation transaction described in (a) above.
F-12 ANNUAL REPORT PAGE 52 MATERIALS --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Plastics $ 5,252 $ 6,013 $5,315 Specialty Materials 1,817 2,007 1,803 --------------------------- Total revenues $ 7,069 $ 8,020 $7,118 =========================== OPERATING PROFIT Plastics $ 1,257 $ 1,603 $1,366 Specialty Materials 339 412 359 --------------------------- Total operating profit $ 1,596 $ 2,015 $1,725 ========================================================= MATERIALS revenues were 12% lower than in 2000, reflecting increased pricing pressures and lower volume at both Plastics and Specialty Materials. Plastics experienced continued softness in the automotive, optical media, telecommunication and business equipment markets while Specialty Materials was adversely affected by lower sales in the semiconductor market. Operating profit was 21% lower, primarily as a result of lower pricing and volume, and negative base cost productivity at both Plastics and Specialty Materials. Operating profit in 2000 increased 17% on revenues that were 13% higher than in 1999. The increases in both revenues and operating profit were primarily attributable to higher volume and improved selling prices at both Plastics and Specialty Materials, which more than offset the effects of higher raw material prices. [GRAPH HERE] - -------------------------------------------------------------------------------- GE ORDERS BACKLOG (In billions) 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- $26.44 $28.53 $32.42 $44.17 $47.43 - -------------------------------------------------------------------------------- NBC revenues declined 15% from the record-high levels of 2000 which were 17% higher than in 1999. Revenues in 2001 were negatively affected by a significant decline in advertising volume and pricing, as well as lost revenue related to coverage of the events of September 11. Revenues in 2000 benefited from broadcast of the 2000 Summer Olympic Games as well as strong growth in cable operations, particularly at CNBC. Operating profit decreased 11% in 2001 reflecting adverse advertising market conditions, events of September 11, and charges resulting from dissolving the XFL, which more than offset savings from cost reduction actions. Operating profit increased 14% in 2000 as growth in owned-and-operated stations, cable operations and network operations was partially offset by higher license fees associated with the renewal of certain sports and prime-time programs. POWER SYSTEMS operating results throughout the last three years reflected the sharp increase in U.S. gas turbine sales of market leading "F" technology, higher prices for those turbines and base cost productivity associated with their manufacture. Secondarily, and with a longer-lasting effect, the portfolio of long-term product services agreements associated with new unit sales has generated favorable operating results. Aero-derivative units revenues also benefited from increased demand in the power generation sector throughout this period. Reflecting these conditions, revenues increased 36% in 2001, following an increase of 47% in 2000. Similarly, operating profit increased 84% in 2001, following an increase of 60% in 2000. Power Systems orders were $24.5 billion in 2001, a 4% increase over 2000, reflecting continued strength of the power generation business and renewed growth in the oil and gas industry. The $28.9 billion total backlog at year-end 2001 comprised unfilled product orders of $24.1 billion (of which 75% was scheduled for delivery in 2002) and product services orders of $4.7 billion scheduled for 2002 delivery. Comparable December 31, 2000, total backlog was $25.1 billion. As a result of softening demand for electric power in the U.S. market, management is in discussions with certain customers regarding their equipment requirements. These discussions may result in changes to contractual agreements, including delays or cancellations. In the event of order cancellation, contractual terms require customers to pay termination fees. In all cases, such fees are expected to cover Power Systems' investment in the contracts and at least a portion has generally been received as progress collections. At least partial recovery of lost profits would also be expected. TECHNICAL PRODUCTS AND SERVICES --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Medical Systems $ 8,409 $ 7,275 $6,171 Global eXchange Services 602 640 692 --------------------------- Total revenues $ 9,011 $ 7,915 $6,863 =========================== OPERATING PROFIT Medical Systems $ 1,803 $ 1,569 $1,204 Global eXchange Services 167 149 155 --------------------------- Total operating profit $ 1,970 $ 1,718 $1,359 ========================================================= TECHNICAL PRODUCTS AND SERVICES revenues rose 14% in 2001, primarily as a result of sharply higher volume at Medical Systems. Sales by businesses acquired during the last two years accounted for 5% of Medical Systems 2001 revenues. Operating profit grew 15%, largely as a result of productivity and volume growth as well as higher realized gains, principally the result of disposition in 2001 of a joint venture at Global eXchange Services. Revenues in 2000 were 15% higher than 1999 on sharply higher volume at Medical Systems. Operating profit increased 26% in 2000, largely as a result of productivity and volume increases at Medical Systems, which more than offset lower selling prices across the segment. F-13 ANNUAL REPORT PAGE 53 Orders received by Medical Systems in 2001 were $8.9 billion, a 17% increase over 2000. The $4.1 billion total backlog at year-end 2001 comprised unfilled product orders of $2.7 billion (of which 68% was scheduled for delivery in 2002) and product services orders of $1.4 billion scheduled for 2002 delivery. Comparable December 31, 2000, total backlog was $3.6 billion. GECS businesses are categorized for management purposes into five operating activities: consumer services, equipment management, mid-market financing, specialized financing and specialty insurance. GECS earnings before accounting changes were $5,586 million in 2001, up 8% from $5,192 million in 2000, with strong double-digit earnings growth in three of the five operating activities. Net earnings in 2000 increased 17% from 1999. Earnings growth throughout the three-year period resulted from origination volume and asset growth, productivity and acquisitions of businesses and portfolios. Principal factors in the 2001 increase were strong productivity ($0.7 billion) and lower taxes ($0.5 billion) partially offset by GE Global Insurance Holdings ($0.5 billion) and lower realized gains on financial instruments. Excluding effects of Paine Webber Group, Inc. (PaineWebber) in 2000 and Americom in 2001, both of which are discussed below, such pre-tax gains were lower in 2001 by $0.5 billion ($0.3 billion after tax). Pre-tax gains on sales of investment securities declined in 2001 by $0.5 billion, of which $0.4 billion related to GE Equity; other GE Equity gains were $0.8 billion lower; while gains on securitizations were up $0.8 billion from 2000. [GRAPH HERE] - -------------------------------------------------------------------------------- GECS REVENUES (In billions) 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- $39.93 $48.70 $55.75 $66.18 $58.35 - -------------------------------------------------------------------------------- On November 9, 2001, GECS exchanged the stock of Americom and other related assets and liabilities for a combination of cash and stock in SES Global, a leading satellite company. The transaction resulted in a gain of $1,158 million ($642 million after tax). On December 28, 2000, Montgomery Ward, LLC (Wards), formerly a GECS subsidiary, filed for bankruptcy protection and began liquidation proceedings. Net earnings for the year 2000 included operating losses from Wards amounting to $245 million as well as a charge, primarily to other costs and expenses, for $815 million ($537 million, after tax) to recognize additional associated losses. o GECS total revenues decreased 12% to $58.4 billion in 2001, following a 19% increase to $66.2 billion in 2000. The three principal reasons for the decrease in revenues in 2001 compared with 2000 were: the deconsolidation of Wards and resulting absence of sales in 2001 ($3.2 billion); the effects of rationalization of operations and market conditions at IT Solutions ($2.9 billion); and reduced surrender fees compared with 2000 ($1.2 billion) associated with the planned run-off of restructured insurance policies of Toho Mutual Life Insurance Company (Toho) at GE Financial Assurance (GEFA). The increase in 2000 reflected post-acquisition revenues from acquired businesses ($6.5 billion) as well as volume growth ($2.5 billion). Revenues in 2000 also included the gain from sale of common stock of PaineWebber ($1.4 billion). Additional information about other revenue items is provided in the analysis of GECS operating activities beginning on page 54. o GECS cost of goods sold declined to $3.3 billion in 2001, compared with $8.5 billion in 2000 and $8.0 billion in 1999, reflecting volume declines at IT Solutions and the deconsolidation of Wards on December 28, 2000, when Wards commenced liquidation proceedings. The increase in 2000 primarily reflected the consolidation of Wards from August 2, 1999, through December 28, 2000. [GRAPH HERE] - -------------------------------------------------------------------------------- GECS EARNINGS BEFORE ACCOUNTING CHANGES (In billions) 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- $3.26 $3.80 $4.44 $5.19 $5.59 - -------------------------------------------------------------------------------- o GECS interest on borrowings in 2001 was $10.6 billion, compared with $11.1 billion in 2000 and $9.4 billion in 1999. The change in both years reflected the effects of both interest rates and the average level of borrowings used to finance asset growth. GECS average composite effective interest rate was 5.11% in 2001, compared with 5.89% in 2000 and 5.14% in 1999. In 2001, average assets of $386.6 billion were 7% higher than in 2000, which in turn were 13% higher than in 1999. See page 60 for a discussion of interest rate risk management. o GECS insurance losses and policyholder and annuity benefits increased to $15.1 billion in 2001, compared with $14.4 billion in 2000 and $11.0 billion in 1999. This increase reflected effects of growth in premium volume and business acquisitions at GEFA throughout the period, and costs discussed in the analysis of Specialty Insurance and All Other GECS operating activities, partially offset by the planned run-off of restructured insurance policies at Toho. o GECS provision for losses on financing receivables was $2.5 billion in 2001, compared with $2.0 billion in 2000 and $1.7 billion in 1999. These provisions principally related to private-label credit cards, bank credit cards, personal loans and auto loans and leases as well as commercial, industrial, and equipment loans and leases, all of which are discussed on page 56 under financing receivables. The provisions throughout the three-year period reflected higher average receivable balances, changes in the mix of business, and the effects of delinquency rates--higher during 2001 and lower during 2000--consistent with industry experience. F-14 ANNUAL REPORT PAGE 54 o GECS other costs and expenses were $19.8 billion, $22.8 billion and $19.4 billion in 2001, 2000 and 1999, respectively. Changes over the three-year period were largely the result of acquisitions and unusual charges, which were more than offset in 2001 by productivity at Consumer Services and Equipment Management. Costs and expenses in 2001 included $0.5 billion of costs in businesses that were acquired after January 1, 2001, as well as $0.3 billion of costs discussed in the analysis of All Other GECS operating activities. Similarly, 2000 included $2.5 billion of costs in businesses that were acquired after January 1, 2000; charges for costs associated with Wards amounting to $0.8 billion, as discussed previously; and $0.5 billion of costs to rationalize certain operations discussed in the analysis of All Other GECS operating activities. Over the last three years, market interest rates have been more volatile than GECS average composite effective interest rates, principally because of the mix of effectively fixed-rate borrowings in the GECS financing structure. GECS portfolio of fixed and floating-rate financial products has behaved similarly over that period. Consequently, financing spreads have remained relatively flat over the three-year period. GECS REVENUES AND NET EARNINGS --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Consumer Services $23,574 $23,893 $18,705 Equipment Management 12,542 14,747 15,383 Mid-Market Financing 8,659 7,026 5,929 Specialized Financing 2,930 4,105 3,308 Specialty Insurance 11,064 11,878 10,643 All other (416) 4,528 1,781 --------------------------- Total revenues $58,353 $66,177 $55,749 =========================== NET EARNINGS Consumer Services $ 2,319 $ 1,671 $ 1,140 Equipment Management 1,607 833 683 Mid-Market Financing 1,280 1,010 822 Specialized Financing 557 1,223 1,019 Specialty Insurance 522 879 1,167 All other (699) (424) (388) --------------------------- Total earnings before accounting changes 5,586 5,192 4,443 Cumulative effect of accounting changes (169) -- -- --------------------------- Net earnings $ 5,417 $ 5,192 $ 4,443 ========================================================= Following is a discussion of revenues and earnings before accounting changes from operating activities within the GECS segment. For purposes of this discussion, earnings before accounting changes is referred to as net earnings. CONSUMER SERVICES --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Global Consumer Finance $ 5,282 $ 5,138 $4,839 GE Financial Assurance 13,565 13,669 9,604 GE Card Services 3,947 3,891 2,478 Other Consumer Services 780 1,195 1,784 --------------------------- Total revenues $23,574 $23,893 $18,705 =========================== NET EARNINGS (a) Global Consumer Finance $ 903 $ 710 $ 580 GE Financial Assurance 687 564 411 GE Card Services 654 495 196 Other Consumer Services 75 (98) (47) --------------------------- Net earnings $ 2,319 $ 1,671 $1,140 ========================================================= (a) Charges of $196 million and $107 million in 2001 and 2000, respectively, were not allocated to this activity and are included in All Other GECS operating activities. - --------------------------------------------------------- CONSUMER SERVICES revenues declined 1% in 2001, following a 28% increase in 2000. Overall, the revenue performance in both years reflected the post-acquisition revenues from acquired businesses and volume growth at GEFA, Global Consumer Finance and Card Services which were offset by decreases at Auto Financial Services and Mortgage Services, which both stopped accepting new business in 2000 (included in Other Consumer Services) and, in 2001, a decrease in surrender fee income at GEFA associated with the planned run-off of restructured insurance policies at Toho. Net earnings increased 39% in 2001 and 47% in 2000. The increase in 2001 reflected productivity benefits at Global Consumer Finance and GEFA, volume growth at Card Services and reduced residual losses at Auto Financial Services. The increase in net earnings in 2000 resulted from acquisition and volume growth at Card Services, GEFA, and Global Consumer Finance, partially offset by losses at Mortgage Services. EQUIPMENT MANAGEMENT --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Aviation Services (GECAS) $ 2,173 $ 1,962 $1,551 Americom 1,698 594 463 IT Solutions 4,180 7,073 8,380 Other Equipment Management 4,491 5,118 4,989 --------------------------- Total revenues $12,542 $14,747 $15,383 =========================== NET EARNINGS (a) Aviation Services (GECAS) $ 470 $ 474 $ 280 Americom 896 195 150 IT Solutions 11 (197) (66) Other Equipment Management 230 361 319 --------------------------- Net earnings $ 1,607 $ 833 $ 683 ========================================================= (a) Charges of $135 million and $191 million in 2001 and 2000, respectively, were not allocated to this activity and are included in All Other GECS operating activities. - --------------------------------------------------------- F-15 ANNUAL REPORT PAGE 55 EQUIPMENT MANAGEMENT revenues decreased 15% in 2001 following a 4% decline in 2000. The decrease in both years was primarily attributable to effects of rationalization of operations and market conditions on revenues at IT Solutions, partially offset by the gain on the disposition of Americom in 2001, and volume growth at GECAS in both years. Other Equipment Management revenues decreased in 2001, primarily as a result of lower volume across all of the remaining businesses. Net earnings increased 93% in 2001 and 22% in 2000, reflecting the Americom gain and productivity benefits at IT Solutions in 2001 and volume growth at GECAS in 2000. The decrease in Other Equipment Management net earnings in 2001 primarily reflected lower results at Transport International Pool and GE Capital Modular Space. MID-MARKET FINANCING --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Commercial Equipment Financing $4,515 $3,610 $3,180 Commercial Finance 1,695 1,543 1,295 Vendor Financial Services 2,095 1,791 1,372 Other Mid-Market Financing 354 82 82 --------------------------- Total revenues $8,659 $7,026 $5,929 =========================== NET EARNINGS (a) Commercial Equipment Financing $ 592 $ 496 $ 396 Commercial Finance 364 280 225 Vendor Financial Services 287 241 200 Other Mid-Market Financing 37 (7) 1 --------------------------- Net earnings $1,280 $1,010 $ 822 ========================================================= (a) Charges of $52 million in 2001 were not allocated to this activity and are included in All Other GECS operating activities. - --------------------------------------------------------- MID-MARKET FINANCING revenues increased 23% in 2001, following a 19% increase in 2000, resulting from acquisition and volume growth at Commercial Equipment Finance, Vendor Financial Services and Commercial Finance, including the acquisition of Heller Financial, Inc. (Heller Financial) on October 24, 2001, (included in Other Mid-Market Financing), and increased gains on securitizations of financial assets. The increase in revenues in 2000 primarily reflected asset growth from originations across all major businesses. Net earnings increased 27% in 2001 and 23% in 2000. Growth in net earnings in 2001 reflected securitization gains and asset growth from acquisitions across all major businesses. In 2000, improvements in net earnings resulted from favorable tax effects and asset growth from originations. SPECIALIZED FINANCING --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Real Estate $1,919 $1,977 $1,582 Structured Finance Group 1,093 999 812 GE Equity (126) 1,079 863 Other Specialized Financing 44 50 51 --------------------------- Total revenues $2,930 $4,105 $3,308 =========================== NET EARNINGS (a) Real Estate $ 486 $ 371 $ 300 Structured Finance Group 385 344 270 GE Equity (270) 525 416 Other Specialized Financing (44) (17) 33 --------------------------- Net earnings $ 557 $1,223 $1,019 ========================================================= (a) Charges of $103 million and $49 million in 2001 and 2000, respectively, were not allocated to this activity and are included in All Other GECS operating activities. - --------------------------------------------------------- SPECIALIZED FINANCING revenues declined 29%, following a 24% increase in 2000, and net earnings declined 54% in 2001 following a 20% increase in 2000. The decrease in revenues and net earnings in 2001 were a result of reduced asset gains at GE Equity, partially offset by profitable origination growth at Structured Finance Group and higher asset gains and productivity benefits at Real Estate. Revenues and net earnings growth in 2000 were principally the result of origination growth across all businesses and a particularly high level of gains on equity investment sales at GE Equity. SPECIALTY INSURANCE --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES Mortgage Insurance $ 1,029 $ 973 $ 936 GE Global Insurance Holdings 9,453 10,223 9,013 Other Specialty Insurance 582 682 694 --------------------------- Total revenues $11,064 $11,878 $10,643 =========================== NET EARNINGS (a) Mortgage Insurance $ 395 $ 366 $ 340 GE Global Insurance Holdings (47) 413 625 Other Specialty Insurance 174 100 202 --------------------------- Net earnings $ 522 $ 879 $ 1,167 ========================================================= (a) Charges of $170 million in 2001 were not allocated to this activity and are included in All Other GECS operating activities. - --------------------------------------------------------- SPECIALTY INSURANCE revenues decreased 7% in 2001, following a 12% increase in 2000, as a result of reduced net premiums earned at GE Global Insurance Holdings (the parent of Employers Reinsurance Corporation), reflecting the events of September 11 as discussed below, and decreased investment income, partially offset by increased premium income associated with origination volume. The increase in 2000 resulted from premium growth and increased investment income, as higher interest income more than offset a decrease in net realized investment gains at GE Global Insurance Holdings. Net pre-tax realized investment gains in the marketable equity and debt securities portfolios amounted to $572 million, $639 million and $811 million in 2001, 2000 and 1999, respectively. Remaining available gains in the portfolios at December 31, 2001, amounted to $509 million before tax. F-16 ANNUAL REPORT PAGE 56 Net earnings decreased 41% and 25% in 2001 and 2000, respectively, reflecting GE Global Insurance Holdings underwriting results. Net earnings in 2001 were adversely affected by approximately $575 million ($386 million after tax) related to the insurance losses arising from the events of September 11. This amount, which primarily resulted from contingent premium payment provisions contained in certain retrocession agreements, comprises $698 million recorded as a reduction in net premiums earned, and $78 million reflecting policyholder losses, partially offset by $201 million reflecting a reduction in insurance acquisition costs. Historical experience related to large catastrophic events has shown that a broad range of total insurance industry loss estimates often exists following such an event and it is not unusual for there to be significant subsequent revisions in such estimates. $575 million is management's best estimate of its existing net liability based on the information currently available, and is net of estimated recoveries under retrocession arrangements, under which a portion of losses is routinely ceded to other reinsurance entities. Substantially all of GECS retrocessionaires are large, highly rated reinsurance entities. At this time, management does not anticipate that any significant portion of its estimated recoveries will be uncollectible. [GRAPH HERE] - -------------------------------------------------------------------------------- CONSOLIDATED INTERNATIONAL REVENUES BY REGION (In billions) 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- Europe $20.63 $24.35 $25.82 $26.67 $26.29 Pacific Basin 7.98 8.06 10.19 15.19 13.30 Americas 6.20 6.91 6.73 7.68 7.89 Other 3.43 3.19 2.94 3.41 3.96 - -------------------------------------------------------------------------------- Net earnings in 2001 and 2000 were also adversely affected by the continued deterioration of underwriting results, reflecting higher property and casualty-related losses (principally as a result of adverse development relating to prior-year loss events) and the continued effects of low premiums in the property and casualty insurance/reinsurance industry. As GE Global Insurance Holdings underwriting results in 2001 and 2000, typical of the global property and casualty industry, were realized, management began underwriting initiatives that increased premium prices for given levels of coverage. These initiatives resulted in management reconsidering and clarifying the product lines, policies, contracts and specific customers for which, given the risk, acceptable future levels of profit seem achievable. For these businesses, GECS has sought to retain or even expand its business. On the other hand, management has identified particular property and casualty business channels from which returns do not appear to justify the risks. For these channels, new business will be significantly curtailed or exited. The majority of the adverse development in 2001, and to a lesser extent in 2000, related to higher projected ultimate losses for liability coverages, especially in the hospital liability, nonstandard automobile (automobile insurance extended to higher-risk drivers) and commercial and public entity general liability lines of business. The increase in 2000 also reflected an increase in industry-wide loss estimates related to certain large property loss events, with the largest impact resulting from the European windstorms occurring in late 1999. The adverse development of GE Global Insurance Holdings for both years was partially mitigated by favorable experience in the Mortgage Insurance business, which resulted from favorable economic conditions, improvement in certain real estate markets and loss mitigation efforts. ALL OTHER GECS --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- REVENUES All Other GECS total revenues $(416) $4,528 $1,781 =========================== NET EARNINGS All Other GECS net earnings $(699) $ (424) $(388) ========================================================= ALL OTHER GECS operating activities includes results of operations of businesses other than those in the five operating activities as well as charges management has not allocated to those activities. In 2001, $436 million of charges, principally for asset write-downs, resulted in a negative total for this category. Revenues in 2000 included the results of Wards through December 28, 2000; a pre-tax gain of $1,366 million from sale of GECS investment in common stock of PaineWebber; and charges of $238 million, principally for asset write-downs. The net loss of $699 million for 2001 included after-tax costs of $656 million in certain unprofitable insurance and financing product lines that are being exited; in disposing of and providing for disposition of several nonstrategic investments and other assets; and in restructuring various global operations. These costs included asset write-downs totaling $285 million. The net loss of $424 million for 2000 comprised the PaineWebber gain of $848 million; charges of $537 million related to Wards; strategic rationalization costs of $347 million related to other operating activities, primarily for asset write-downs, employee severance and lease terminations; and operating losses from Wards of $245 million. FINANCING RECEIVABLES is the largest category of assets for GECS and represents one of its primary sources of revenues. The portfolio of financing receivables, before allowance for losses, increased to $178.8 billion at the end of 2001 from $147.3 billion at the end of 2000, as discussed in the following paragraphs. The related allowance for losses at the end of 2001 amounted to $4.8 billion ($4.0 billion at the end of 2000), representing management's best estimate of probable losses inherent in the portfolio. F-17 ANNUAL REPORT PAGE 57 In GECS financing receivables, "nonearning" receivables are those that are 90 days or more delinquent (or for which collection has otherwise become doubtful) and "reduced-earning" receivables are commercial receivables whose terms have been restructured to a below-market yield. Consumer financing receivables, primarily credit card and personal loans and auto loans and leases, were $52.3 billion at year-end 2001, an increase of $3.5 billion from year-end 2000. Credit card and personal receivables increased $7.0 billion, primarily from increased origination and acquisition growth, partially offset by sales and securitizations and the net effects of foreign currency translation. Auto receivables decreased $3.5 billion, primarily as a result of the run-off of the liquidating Auto Financial Services portfolio. Nonearning consumer receivables at year-end 2001 were $1.5 billion, about 2.9% of outstandings, compared with $1.1 billion, about 2.3% of outstandings at year-end 2000. Write-offs of consumer receivables increased to $1.7 billion from $1.3 billion for 2000, reflecting the maturing of private label credit card portfolios and higher personal bankruptcies on credit card loan portfolios in Japan. Consistent with industry trends, consumer delinquency rates increased during 2001. [GRAPH HERE] - -------------------------------------------------------------------------------- CONSOLIDATED TOTAL ASSETS (In billions) 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- United States $206.46 $227.11 $263.78 $277.82 $315.18 International 97.55 128.82 141.26 159.19 179.84 - -------------------------------------------------------------------------------- Other financing receivables, which totaled $126.5 billion at December 31, 2001, consisted of a diverse commercial, industrial and equipment loan and lease portfolio. This portfolio increased $28.0 billion during 2001, reflecting increased acquisition and origination growth, partially offset by sales and securitizations. Related nonearning and reduced-earning receivables were $1.7 billion, about 1.4% of outstandings at year-end 2001, compared with $0.9 billion, about 1.0% of outstandings at year-end 2000, reflecting several large bankruptcies and the current economic environment. These receivables are backed by assets and are covered by reserves for probable losses. GECS loans and leases to commercial airlines amounted to $21.5 billion at the end of 2001, up from $15.3 billion at the end of 2000. GECS commercial aircraft positions also included financial guarantees, funding commitments, credit and liquidity support agreements and aircraft orders as discussed in note 17. INTERNATIONAL OPERATIONS Estimated results of international activities include the results of GE and GECS operations located outside the United States plus all U.S. exports. Certain GECS operations that cannot meaningfully be associated with specific geographic areas are classified as "other international" for this purpose. International revenues of $51.4 billion, $53.0 billion and $45.7 billion in 2001, 2000 and 1999, respectively, represented about 41% of consolidated revenues in each year. CONSOLIDATED INTERNATIONAL REVENUES --------------------------- (In millions) 2001 2000 1999 - --------------------------------------------------------- Europe $23,878 $24,144 $22,919 Pacific Basin 11,447 12,921 7,879 Americas 5,507 5,912 5,229 Other 3,456 2,842 2,136 --------------------------- 44,288 45,819 38,163 Exports from the U.S. to external customers 7,149 7,138 7,513 --------------------------- $51,437 $52,957 $45,676 ========================================================= GE international revenues grew to $28.3 billion in 2001, an increase of $1.6 billion (6%) over 2000. Revenues in 2000 were $26.7 billion, $2.7 billion (11%) higher than in 1999. The increase in 2001 was attributable to sales in operations based outside the United States, which grew 8% to $21.2 billion. European revenues were 16% higher in 2001, led by increases at Power Systems and Medical Systems. Revenues in the Americas (North and South America, except for the United States) increased 6%, reflecting continued growth in both Canadian and Latin American operations. Pacific Basin revenues and total U.S. exports in 2001 were relatively unchanged from 2000. GECS international revenues were $23.1 billion in 2001, a decrease of 12% from $26.3 billion in 2000. Revenues in the Pacific Basin decreased 19% in 2001, as 2000 revenues included surrender fee income at GEFA from the planned run-off of restructured insurance policies of Toho. Revenues in Europe decreased 12% in 2001 as acquisition and core growth at Global Consumer Finance were more than offset by reduced premiums earned, associated with a combination of lower origination volume and increased ceded premiums as a result of the events of September 11 at GE Global Insurance Holdings, and reduced revenue associated with the rationalization of certain operations at IT Solutions. Consolidated international operating profit was $6.1 billion in 2001, a decrease of 11% over 2000, which was 21% higher than in 1999. Additional information about operating profit by region is provided in note 28. Total assets of international operations were $180.0 billion in 2001 (36% of consolidated assets), an increase of 13% over 2000. GECS assets increased 23% in Europe, reflecting a mix of origination and acquisition growth. GECS also achieved significant asset growth at GECAS, which is classified as "other international" in note 28. F-18 ANNUAL REPORT PAGE 58 The international activities of GE and GECS span all global regions and primarily encompass manufacturing for local and export markets, import and sale of products produced in other regions, leasing of aircraft, sourcing for GE plants domiciled in other global regions and provision of financial services within these regional economies. Thus, when countries or regions experience currency and/or economic stress, GE may have increased exposure to certain risks but also may have new profit opportunities. Potential increased risks include, among other things, higher receivables delinquencies and bad debts, delays or cancellation of sales and orders principally related to power and aircraft equipment, higher local currency financing costs and a slowdown in established financial services activities. New profit opportunities include, among other things, lower costs of goods sourced from countries with weakened currencies, more opportunities for lower cost outsourcing, expansion of industrial and financial services activities through purchases of companies or assets at reduced prices and lower U.S. debt financing costs. Financial results of GE international activities reported in U.S. dollars are affected by currency exchange. A number of techniques are used to manage the effects of currency exchange, including selective borrowings in local currencies and selective hedging of significant cross-currency transactions. Principal currencies are the euro, the Japanese yen and the Canadian dollar. GE and GECS operations in Europe are all euro-capable as of January 1, 2002. REGARDING ENVIRONMENTAL MATTERS, GE's operations, like operations of other companies engaged in similar businesses, involve the use, disposal and cleanup of substances regulated under environmental protection laws. In 2001, GE expended about $52 million for capital projects related to the environment. The comparable amount in 2000 was $48 million. These amounts exclude expenditures for remediation actions, which are principally expensed and are discussed below. Capital expenditures for environmental purposes have included pollution control devices--such as wastewater treatment plants, groundwater monitoring devices, air strippers or separators, and incinerators--at new and existing facilities constructed or upgraded in the normal course of business. Consistent with policies stressing environmental responsibility, average annual capital expenditures other than for remediation projects are presently expected to be about $55 million over the next two years for new or expanded programs to build facilities or modify manufacturing processes to minimize waste and reduce emissions. This is about the same level as recent experience. GE also is involved in a sizable number of remediation actions to clean up hazardous wastes as required by federal and state laws. Such statutes require that responsible parties fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site. Expenditures for site remediation actions amounted to approximately $119 million in 2001, compared with $128 million in 2000. It is presently expected that such remediation actions will require average annual expenditures in the range of $110 million to $150 million over the next two years. The U.S. Environmental Protection Agency ruled in February 2002 that approximately 150,000 pounds of polychlorinated biphenyls (PCBs) must be dredged from a 40-mile stretch of the upper Hudson River in New York State. GE's December 31, 2001, Statement of Financial Position includes a liability for the estimated costs of this remediation. NO RELATED PARTY TRANSACTIONS had a material effect on GE's financial position, cash flows or results of operations. Certain immaterial related party transactions are discussed in the 2001 proxy statement, available from GE. MANAGEMENT'S DISCUSSION OF FINANCIAL RESOURCES AND LIQUIDITY OVERVIEW This discussion of financial resources and liquidity addresses the Statement of Financial Position (page 44), Statement of Changes in Share Owners' Equity (page 42) and the Statement of Cash Flows (page 46). Only a small portion of GECS business is directly related to other GE operations. The fundamental differences between GE and GECS are reflected in the measurements commonly used by investors, rating agencies and financial analysts. These differences will become clearer in the discussion that follows with respect to the more significant items in the financial statements. STATEMENT OF FINANCIAL POSITION Because GE and GECS share certain significant elements of their Statements of Financial Position--property, plant and equipment, and borrowings, for example--the following discussion addresses significant captions in the "consolidated" statement. Within the following discussions, however, distinction is drawn between GE and GECS activities in order to permit meaningful analysis of each individual statement. INVESTMENT SECURITIES for each of the past two years comprised mainly investment-grade debt securities held by GEFA and the specialty insurance businesses of GECS in support of obligations to annuitants and policyholders. GE investment securities were $0.9 billion at year-end 2001, a decrease of $0.1 billion from 2000, reflecting decreases in the fair value of equity and corporate debt securities partially offset by additional investments. GECS investment securities were $100.1 billion in 2001, compared with $90.3 billion in 2000. The increase of $9.8 billion resulted from investment of premiums received, reinvestment of investment income, and the addition of securities from acquired companies, partially offset by sales and maturities as well as decreases in the fair value of certain debt and equity securities. See note 9 for further information. F-19 ANNUAL REPORT PAGE 59 WORKING CAPITAL, representing GE cash invested in inventories and receivables from customers less trade payables and progress payments, has improved significantly over the past three years. Working capital declined from an investment of $5.0 billion at the beginning of 1999 to a negative $2.4 billion at the end of 2001 on much higher progress collections from Power Systems customers. As Power Systems completes its orders backlog over the next few years, progress collections of $11.8 billion at December 31, 2001, will be earned, affecting working capital turnover adversely. Nevertheless, working capital performance at the end of this backlog fulfillment period is expected to be improved from January 1, 1999, the result of Six Sigma and Digitization initiatives. Current receivables and inventories, two important elements of working capital, are discussed in the following paragraphs. CURRENT RECEIVABLES for GE were $9.8 billion at the end of 2001, an increase of $0.1 billion from year-end 2000, and included $5.9 billion due from customers at the end of 2001, compared with $6.3 billion at the end of 2000. Turnover of customer receivables from sales of goods and services was 10.1 in 2001, compared with 10.0 in 2000. Other current receivables are primarily amounts that did not originate from sales of GE goods or services, such as advances to suppliers in connection with large contracts. INVENTORIES for GE were $8.3 billion at December 31, 2001, up $1.1 billion from the end of 2000. GE inventory turnover was 7.9 in 2001, a decrease from 8.5 in 2000, as a result of higher inventories in short-cycle businesses. GECS inventories were $270 million and $666 million at December 31, 2001 and 2000, respectively. The decrease in 2001 primarily reflected the rationalization of certain operations at IT Solutions, as well as improved inventory management. FINANCING RECEIVABLES of GECS were $174.0 billion at year-end 2001, net of allowance for losses, up $30.7 billion over 2000. These receivables are discussed on page 56 and in notes 12 and 13. INSURANCE RECEIVABLES of GECS were $27.3 billion at year-end 2001, an increase of $3.5 billion. The increase was primarily attributable to increased recoveries under existing retrocession agreements and core growth, partially offset by the planned run-off of assets at Toho (see note 14). OTHER RECEIVABLES of GECS totaled $13.3 billion at both December 31, 2001 and 2000, and consists primarily of nonfinancing customer receivables, accrued investment income, amounts due from GE (generally related to certain trade payable programs), amounts due under operating leases, receivables due on sales of securities and various sundry items. PROPERTY, PLANT AND EQUIPMENT (including equipment leased to others) was $42.1 billion at December 31, 2001, up $2.1 billion from 2000. GE property, plant and equipment consists of investments for its own productive use, whereas the largest element for GECS is in equipment provided to third parties on operating leases. Details by category of investment are presented in note 15. GE expenditures for plant and equipment during 2001 totaled $2.9 billion, compared with $2.5 billion in 2000. Total expenditures for the past five years were $12.2 billion, of which 40% was investment for growth through new capacity and product development; 34% was investment in productivity through new equipment and process improvements; and 26% was investment for other purposes such as improvement of research and development facilities and safety and environmental protection. GECS additions to property, plant and equipment (including equipment leased to others), were $12.6 billion during 2001 ($11.4 billion during 2000), primarily reflecting acquisitions of transportation equipment. INTANGIBLE ASSETS were $31.6 billion at year-end 2001, up from $27.4 billion at year-end 2000. GE intangibles increased to $12.9 billion from $12.4 billion at the end of 2000, principally as a result of goodwill related to acquisitions by Power Systems and Medical Systems, partially offset by amortization. GECS intangibles increased $3.7 billion to $18.7 billion, reflecting goodwill and other intangibles associated with acquisitions, the largest of which was the acquisition of Heller Financial, partially offset by amortization. ALL OTHER ASSETS totaled $80.5 billion at year-end 2001, an increase of $6.6 billion from the end of 2000. GE other assets increased $2.0 billion, principally reflecting an increase in the prepaid pension asset partially offset by a decrease in long-term receivables. GECS other assets increased $4.7 billion as a result of additional investments in real estate and associated companies, the recognition of all derivatives at fair value in accordance with SFAS 133, and increases in deferred insurance acquisition costs, partially offset by decreases in "separate accounts" (see note 17). CONSOLIDATED BORROWINGS aggregated $232.9 billion at December 31, 2001, compared with $201.3 billion at the end of 2000. The major debt-rating agencies evaluate the financial condition of GE and of GE Capital (the major public borrowing entity of GECS) differently because of their distinct business characteristics. Using criteria appropriate to each and considering their combined strength, those major rating agencies continue to give the highest ratings to debt of both GE and GE Capital. GE total borrowings were $2.5 billion at year-end 2001 ($1.7 billion short term, $0.8 billion long term), an increase of $0.7 billion from year-end 2000. GE total debt at the end of 2001 equaled 4.3% of total capital, up from 3.3% at the end of 2000. GECS total borrowings were $239.9 billion at December 31, 2001, of which $160.8 billion is due in 2002 and $79.1 billion is due in subsequent years. Comparable amounts at the end of 2000 were $205.4 billion in total, $124.0 billion due within one year and $81.4 billion due thereafter. A large portion of F-20 ANNUAL REPORT PAGE 60 GECS borrowings ($117.5 billion and $94.5 billion at the end of 2001 and 2000, respectively) was issued in active commercial paper markets that management believes will continue to be a reliable source of short-term financing. Most of this commercial paper was issued by GE Capital. The average remaining terms and interest rates of GE Capital commercial paper were 46 days and 2.37% at the end of 2001, compared with 45 days and 6.43% at the end of 2000. The GE Capital ratio of debt to equity was 7.31 to 1 at the end of 2001 and 7.53 to 1 at the end of 2000. INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS were $114.2 billion, $8.1 billion higher than in 2000. The increase was primarily attributable to the addition of reserves associated with the events of September 11, and growth in deferred annuities and guaranteed investment contracts, partially offset by the planned run-off of policyholder contracts at Toho and decreases in separate accounts. For additional information on these liabilities, see note 19. INTEREST RATE AND CURRENCY RISK MANAGEMENT is important in the normal business activities of GE and GECS. Derivative financial instruments are used by GE and GECS to mitigate or eliminate certain financial and market risks, including those related to changes in interest rates and currency exchange rates. As a matter of policy, neither GE nor GECS engages in derivatives trading, derivatives market-making or other speculative activities. The U.S. Securities and Exchange Commission requires that registrants provide information about potential effects of changes in interest rates and currency exchange. Although the rules offer alternatives for presenting this information, none of the alternatives is without limitations. The following discussion is based on so-called "shock tests," which model effects of interest rate and currency shifts on the reporting company. Shock tests, while probably the most meaningful analysis permitted, are constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by their inability to include the complex market reactions that normally would arise from the market shifts modeled. While the following results of shock tests for changes in interest rates and currency exchange rates may have some limited use as benchmarks, they should not be viewed as forecasts. o One means of assessing exposure to interest rate changes is a duration-based analysis that measures the potential loss in net earnings resulting from a hypothetical increase in interest rates of 100 basis points across all maturities (sometimes referred to as a "parallel shift in the yield curve"). Under this model with all else constant, it is estimated that such an increase, including repricing in the securities portfolio, would reduce the 2002 net earnings of GECS based on year-end 2001 positions by approximately $189 million; the pro forma effect for GE was insignificant. Based on positions at year-end 2000, the pro forma effect on 2001 net earnings of such an increase in interest rates was estimated to be a decrease of approximately $124 million for GECS and was insignificant for GE. o The geographic distribution of GE and GECS operations is diverse. One means of assessing exposure to changes in currency exchange rates is to model effects on reported earnings using a sensitivity analysis. Year-end 2001 consolidated currency exposures, including financial instruments designated and effective as hedges, were analyzed to identify GE and GECS assets and liabilities denominated in other than their relevant functional currencies. Net unhedged exposures in each currency were then remeasured assuming a 10% decrease (substantially greater decreases for hyperinflationary currencies) in currency exchange rates compared with the U.S. dollar. Under this model, management estimated at year-end 2001 that such a decrease would have an insignificant effect on 2002 earnings of either GE or GECS. STATEMENT OF CHANGES IN SHARE OWNERS' EQUITY Share owners' equity increased $4.3 billion, $7.9 billion and $3.7 billion in 2001, 2000 and 1999, respectively. The increases were largely attributable to net earnings of $13.7 billion, $12.7 billion and $10.7 billion partially offset by dividends of $6.6 billion, $5.6 billion and $4.8 billion in 2001, 2000 and 1999, respectively. Currency translation adjustments reduced equity by $562 million, $1,204 million and $632 million in 2001, 2000 and 1999, respectively. Changes in the currency translation adjustment reflect the effects of changes in currency exchange rates on GE net investment in non-U.S. subsidiaries that have functional currencies other than the U.S. dollar. Over the three-year period, changes in the currency translation adjustment were largely affected by exchange rate changes in the euro and Asian currencies. The euro was relatively unchanged versus the U.S. dollar in 2001 after weakening in 2000 and 1999. Asian currencies weakened in 2001 and 2000 after strengthening in 1999. Accumulated currency translation adjustments affect net earnings only when all or a portion of an affiliate is disposed of. Adoption of SFAS 133 in 2001 reduced equity by $955 million, including $827 million at the date of adoption. Further information about this accounting change is provided in note 1. STATEMENT OF CASH FLOWS Because cash management activities of GE and GECS are separate and distinct, it is more useful to review their cash flows separately. GE CASH AND EQUIVALENTS aggregated $10.4 billion at the end of 2001, up from $7.2 billion at year-end 2000. GE periodically invests available cash in GECS short-term borrowings. Such amounts are classified as cash equivalents in the GE Statement of Financial Position and amounted to $8.7 billion and $5.1 billion at December 31, 2001 and 2000, respectively. During 2001, GE generated a record F-21 ANNUAL REPORT PAGE 61 $17.2 billion in cash from operating activities, a $1.8 billion increase over 2000 primarily due to the 11% increase in earnings before accounting changes. Of this increase, $200 million is attributable to higher 2001 progress collections, primarily at Power Systems. Excluding progress collections in both 2001 and 2000, cash from operating activities increased 13% in 2001. The 2001 cash generation provided the necessary resources to purchase $3.1 billion of GE common stock under the share repurchase program described below, to pay $6.4 billion in dividends to share owners, to contribute $3.0 billion to GECS, a portion of which was used to partially fund the acquisition of Heller Financial, to invest $2.9 billion in plant and equipment and to make $1.4 billion in acquisitions. Operating activities are the principal source of GE's cash flows. Over the past three years, operating activities have provided more than $44 billion of cash. The principal application of this cash was distributions of approximately $24 billion to share owners, both through payment of dividends ($16.3 billion) and through the share repurchase program ($7.2 billion) described below. Other applications included investment in plant and equipment ($7.4 billion), acquisitions ($4.2 billion) and the 2001 capital contribution of $3.0 billion to GECS. [GRAPH HERE] - -------------------------------------------------------------------------------- CASH FROM OPERATING ACTIVITIES (In billions) 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- $9.21 $9.64 $10.00 $12.16 $13.75 Progress collections 0.11 0.39 1.77 3.26 3.45 - -------------------------------------------------------------------------------- Under the share repurchase program initiated in December 1994, GE has purchased 1.0 billion shares of GE stock. In December 2001, GE's Board of Directors increased the amount authorized from $22 billion to $30 billion. Funds used for the share repurchase are expected to be generated largely from operating cash flow. Based on past performance and current expectations, in combination with the financial flexibility that comes with a strong balance sheet and the highest credit ratings, management believes that GE is in a sound position to complete the share repurchase program, to grow dividends in line with earnings, and to continue making selective investments for long-term growth. Expenditures for plant and equipment are expected to be about $2.3 billion in 2002, principally for productivity and growth. GECS CASH AND EQUIVALENTS aggregated $7.3 billion at the end of 2001, up from $6.1 billion at year-end 2000. One of the primary sources of cash for GECS is short and long-term borrowings. Over the past three years, GECS borrowings with maturities of 90 days or less have increased by $28.8 billion. New borrowings of $125.2 billion having maturities longer than 90 days were added during those years, while $94.9 billion of such longer-term borrowings were retired. GECS also generated $41.7 billion from operating activities, which benefited in 2001 from an increase in insurance liabilities and reserves, net of an increase in reinsurance recoverables, and a decrease from the planned run-off of policyholder contracts at Toho. The principal use of cash by GECS has been investing in assets to grow its businesses. Of the $110.1 billion that GECS invested over the past three years, $42.7 billion was used for additions to financing receivables; $37.5 billion was used to invest in new equipment, principally for lease to others; and $22.2 billion was used for acquisitions of new businesses, the largest of which were Heller Financial and Mellon Leasing in 2001 and Japan Leasing and the credit card operations of JC Penney in 1999. With the financial flexibility that comes with excellent credit ratings, management believes that GECS should be well positioned to meet the global needs of its customers for capital and to continue providing GE share owners with good returns. LIQUIDITY The major debt-rating agencies evaluate the financial condition of GE and of GE Capital, the major public borrowing entity of GECS, differently because of their distinct business characteristics. Factors that are important to the ratings of both include the following: cash generating ability--including cash generated from operating activities; earnings quality--including revenue growth and the breadth and diversity of sources of income; leverage ratios--such as debt to total capital and interest coverage; and asset utilization, including return on assets and asset turnover ratios. Considering those factors, as well as other criteria appropriate to GE and GECS individually, those major rating agencies continue to give the highest ratings to debt of both GE and GE Capital (long-term credit rating AAA/Aaa; short-term credit rating A-1+/P-1). GLOBAL COMMERCIAL PAPER MARKETS are a primary source of liquidity for GE and GECS. GE Capital is the most widely-held name in those markets, with $117.5 billion and $94.5 billion outstanding at the end of 2001 and 2000, respectively. Money markets are extremely robust. In 2001, GE Capital's commercial paper accounted for only 2.4% of activity with maturities of less than one year in the U.S. market, the largest of the global money markets. Management believes that alternative sources of liquidity are sufficient to permit an orderly transition from commercial paper in the unlikely event of impaired access to those markets. Funding sources on which management would rely would depend on the nature of such a hypothetical event, but include $33 billion of contractually committed lending agreements with highly-rated global banks, medium and long-term funding, monetization and asset securitization, cash receipts from GECS lending and leasing activities, short-term secured funding on global assets, and asset sales. Strength of commercial paper markets and GE Capital's access to those markets was evidenced on and immediately after September 11, when many financial markets were closed, but GE Capital continued to issue commercial paper without interruption. F-22 ANNUAL REPORT PAGE 62 OFF-BALANCE SHEET ARRANGEMENTS are used in the ordinary course of business to achieve improved share owner returns. One of the most common forms of off-balance sheet arrangements is asset securitization. The transactions described below are similar to those used by many financial institutions and are part of an $800 billion annual market for asset-backed commercial paper. GE and GECS use sponsored and third-party entities as well as term execution for securitizations. As part of this program, management considers the relative risks and returns of each alternative and predominantly uses sponsored entities. Management believes these transactions could be readily executed through non-sponsored entities or term securitization at insignificant incremental cost. In addition to improved share owner returns, special purpose entities serve as funding sources for a variety of diversified lending and securities transactions, transfer selected credit risk and improve cash flows while enhancing the ability to provide a full range of competitive products for customers. The discussion below and on page 63 describes sponsored special purpose entities, and is organized as follows: o STRUCTURE of sponsored special purpose entities and of transactions that result in gains on sales and removal of assets from the financial statements. This section describes assets in the entities as well as management prohibitions on certain types of activities. o SUPPORT, both financial and operational, provided for special purpose entities. This section describes the potential risks associated with special purpose entities as well as management's measures to control risk and conclusions about its potential significance. o ACCOUNTING OUTLOOK for these entities. This section briefly discusses the accounting policy deliberations that have been undertaken recently regarding special purpose entities. STRUCTURE. Simply stated, GE and GECS are selling high-quality, low-yield financial assets to highly-rated entities that have financed those purchases using low-cost commercial paper. Because GECS is the sponsor of these entities and guarantees certain of their positions, management believes that the structures warrant a more complete explanation, as follows. The first step in the securitization process uses entities that meet the accounting criteria for Qualifying Special Purpose Entities (qualifying entities). Among other criteria, a qualifying entity's activities must be restricted to passive investment in financial assets and issuance of beneficial interests in those assets. Under generally accepted accounting principles, entities meeting these criteria are not consolidated in the sponsor's financial statements. GE and GECS sell selected financial assets to qualifying entities. Examples include GECS financing and credit card receivables and GE trade receivables. On the whole, the credit quality of such assets is equal to or higher than the credit quality of similar assets owned by GE and GECS. Qualifying entities raise cash by issuing beneficial interests--rights to cash flows from the assets--to other GECS-sponsored special purpose entities that issue highly-rated commercial paper to third-party institutional investors. These entities use commercial paper proceeds to obtain beneficial interests in the financial assets of qualifying entities, as well as financial assets originated by multiple third parties. GECS provides credit support for certain of these assets, as well as liquidity support for the commercial paper, as described on page 63. In accordance with its contractual commitments to the entities, GECS rigorously underwrites and services the associated assets, both those originated by GE or GECS, and those originated by other participants. All of the entities' assets serve as collateral for the commercial paper. These entities are not consolidated in the accompanying financial statements. Support activities include credit reviews at acquisition and ongoing review, billing and collection activities--the same support activities that GECS employs for its own financing receivables. GECS-sponsored special purpose entities are routinely evaluated by the major credit rating agencies, including monthly reviews of key performance indicators and annual reviews of asset quality. Commercial paper issued by these entities has always received the highest available ratings from the major credit rating agencies and at year-end 2001 was rated A-1+/P-1. The following table summarizes receivables held by special purpose entities. --------------------------- December 31 (In millions) 2001 2000 - --------------------------------------------------------- Receivables--secured by Equipment $ 12,781 $ 7,993 Commercial real estate 9,971 7,445 Other assets 7,761 6,249 Credit card receivables 9,470 6,170 Trade receivables 3,028 3,138 --------------------------- Total receivables $43,011 $30,995 ========================================================= GE assets included in the categories above at year-end 2001 and 2000, respectively, are as follows: Equipment--$631 million and $269 million; Other assets--$757 million and $611 million; Trade receivables--$2,396 million and $1,733 million. - --------------------------------------------------------- Each of the categories of assets shown in the table above represent portfolios of assets that, in addition to being highly rated, are diversified to avoid concentrations of risk. In each of the first three categories, financing receivables are collateralized by a diverse mix of assets. Examples of assets in each category follow: equipment--loans and leases on manufacturing and transportation equipment; commercial real estate--loans on diversified commercial property; other assets--diversified commercial loans; credit card receivables--more than 23 million individual accounts; trade receivables--balances of high credit quality accounts from sales of a broad range of products and services to a diversified customer base. F-23 ANNUAL REPORT PAGE 63 In addition to the activities discussed previously, Financial Guaranty Insurance Company (FGIC), a GECS affiliate that is a leader in the municipal bond insurance market, uses special purpose entities that offer municipalities guaranteed investment contracts with interests in high-quality, fixed-maturity, investment grade assets. FGIC actively manages these assets under strict investment criteria and GE Capital also provides certain performance guarantees. Total assets in sponsored FGIC entities amounted to $13.4 billion and $10.2 billion at December 31, 2001 and 2000, respectively. None of these special purpose entities or qualifying entities is permitted to hold GE stock and there are no commitments or guarantees that provide for the potential issuance of GE stock. These entities do not engage in speculative activities of any description, are not used to hedge GE or GECS positions, and under GE integrity policies, no GE employee is permitted to invest in any sponsored special purpose entity. SUPPORT. Financial support for certain special purpose entities is provided in the following ways. o Under active liquidity support agreements, GECS has agreed to lend to these entities on a secured basis if (a) certain market conditions render the entities unable to issue new debt instruments, or (b) the entity's credit ratings were reduced below specified levels. The maximum amount of such support for commercial paper outstanding was $43.2 billion at December 31, 2001. Under related unused liquidity support agreements, GECS has made additional liquidity support commitments of $9.4 billion at December 31, 2001, that would be effective upon addition of qualified assets to the entities. o Under credit support agreements, GECS provides recourse for a maximum of $14.5 billion of credit losses in special purpose entities. $9.1 billion of this support represents full recourse for certain assets; the balance is based on loss-sharing formulas. Assets with credit support are funded by commercial paper that is subject to the liquidity support described above. Potential credit losses are provided for in GE and GECS financial statements based on management's best estimate of probable losses inherent in the portfolio using the same methodology as for owned assets. GECS allowances for losses amounted to $0.7 billion and $0.6 billion at year-end 2001 and 2000, respectively. o Performance guarantees relate to letters of credit and liquidity support for guaranteed investment contracts and are subject to a maximum of $3.8 billion at December 31, 2001. Management has extensive experience in evaluating economic, liquidity and credit risk. In view of this experience, the high quality of assets in these entities, the historically robust quality of commercial paper markets, and the historical reliability of controls applied both to asset servicing and to activities in the credit markets, management believes that, under any reasonable future economic developments, the likelihood is remote that any such arrangements could have a significant effect on GE or GECS operations, cash flows or financial position. Sales of securitized assets to special purpose entities result in a gain or loss amounting to the net of sales proceeds, the carrying amount of net assets sold, the fair value of servicing rights and an allowance for losses. Securitization sales resulted in gains of $1.3 billion and about $0.5 billion in 2001 and 2000, respectively, and are included in GECS revenues. ACCOUNTING OUTLOOK. Various generally accepted accounting principles specify the conditions that GE and GECS observe in not consolidating special purpose entities and qualifying entities. Accounting for special purpose entities is under review by the Financial Accounting Standards Board, and their non-consolidated status may change as a result of those reviews. SUMMARY. The special purpose entities described above meet GE's economic objectives for their use while complying with generally accepted accounting principles. In the event that accounting rules change in a way that adversely affects sponsored entities, alternative securitization techniques discussed on page 62 would likely serve as a substitute at insignificant incremental cost. PRINCIPAL DEBT CONDITIONS that could automatically result in remedies, such as acceleration of GE or GECS debt, are described below. o If the short-term credit rating of GE Capital or certain special purpose entities previously discussed were to fall below. A-1+/P-1, GE Capital would be required to provide substitute liquidity for those entities or to purchase the outstanding commercial paper. The maximum amount that GE Capital would be required to provide in the event of such a downgrade is $43.2 billion at December 31, 2001. o If the long-term credit rating of GE Capital or certain special purpose entities previously discussed were to fall below AA-/Aa3, GE Capital would be required to provide substitute credit support or liquidate the special purpose entities. The maximum amount that GE Capital would be required to substitute in the event of such a downgrade is $14.5 billion at December 31, 2001. o If the long-term credit rating of either GE or GECS under certain swap, forward and option contracts falls below A-/A3, certain remedies are required as discussed in note 29. o If GE Capital's ratio of earnings to fixed charges, which was 1.72 to 1 at the end of 2001 deteriorates to 1.10 to 1 or, upon redemption of certain preferred stock, its ratio of debt to equity, which was 7.31 to 1 at the end of 2001 exceeds 8 to 1, GE has committed to contribute capital to GE Capital. GE also has guaranteed subordinated debt of GECS with a face amount of $1.0 billion at December 31, 2001, and 2000. o If the GE long-term credit rating were to fall below investment grade (a downgrade of 9 ratings increments), certain special purpose entities with which GE has financing arrangements would have the right to terminate those arrangements potentially requiring $2.5 billion of secured funding. F-24 ANNUAL REPORT PAGE 64 None of these conditions has been met in GE or GECS history, and management believes that under any reasonable future economic developments, the likelihood is remote that any such arrangements could have a significant effect on GE and GECS operations, cash flows or financial position. TIMING OF CONTRACTUAL COMMITMENTS at GE and GECS, related to leases and debt, follow. - ------------------------------------------------------------------------------ (In billions) 2002 2003 2004 2005 2006 - ------------------------------------------------------------------------------ GE $ 2.2 $ 0.5 $ 0.5 $ 0.3 $ 0.3 GECS Commercial paper 117.5 -- -- -- -- Other 44.4 26.4 15.2 10.5 6.9 - ------------------------------------------------------------------------------ MANAGEMENT'S DISCUSSION OF SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA summarized on the following page are divided into three sections: upper portion--consolidated data; middle portion--GE data that reflect various conventional measurements for such enterprises; and lower portion--GECS data that reflect key information pertinent to financial services businesses. GE'S TOTAL RESEARCH AND DEVELOPMENT expenditures were $2,349 million in 2001, up 7% over 2000, which was 9% higher than 1999. In 2001, expenditures from GE's own funds were $1,980 million, an increase of 6% over 2000, reflecting continuing research and development work related to new product, service and process technologies. Product technology efforts in 2001 included continuing development work on the next generation of gas turbines, further advances in state-of-the-art diagnostic imaging technologies, and development of more fuel-efficient, cost-effective aircraft engine designs. Services technologies include advances in diagnostic applications, including remote diagnostic capabilities related to repair and maintenance of medical equipment, aircraft engines, power generation equipment and locomotives. Process technologies provided improved product quality and performance and increased capacity for manufacturing engineered materials. Expenditures funded by customers (mainly the U.S. government) were $369 million in 2001, up $43 million from 2000. GE'S TOTAL BACKLOG of firm unfilled orders at the end of 2001 was $47.4 billion, an increase of 7% over 2000, reflecting strong double-digit growth at Power Systems, Medical Systems and Transportation Systems, partially offset by lower backlog at Aircraft Engines. Of the total, $38.9 billion related to products, of which 70% was scheduled for delivery in 2002. Product services orders, included in this reported backlog for only the succeeding 12 months, were $8.4 billion at the end of 2001. Orders constituting this backlog may be canceled or deferred by customers, subject in certain cases to penalties. See Segment Operations beginning on page 50 for further information. [GRAPH HERE] - -------------------------------------------------------------------------------- GE SHARE PRICE ACTIVITY (In dollars) 1997 1998 1999 2000 2001 - -------------------------------------------------------------------------------- High $25.52 $34.65 $53.17 $60.50 $52.90 Low 15.98 23.00 31.42 41.67 28.25 Close 24.46 34.00 51.58 47.94 40.08 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES High-quality financial statements require rigorous application of high-quality accounting policies. The policies discussed below are considered by management to be critical to an understanding of GE's financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. LOSSES ON FINANCING RECEIVABLES are recognized when they are incurred. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral value, and the present and expected levels of interest rates. GECS exposure to losses on financing receivables at year-end 2001 was approximately $193 billion, including credit support for special purpose entities, against which an allowance for losses of approximately $5.5 billion was provided. An analysis of changes in the allowance for losses is provided on page 56 which discusses financing receivable portfolio quality. While losses depend to a large degree on future economic conditions, management does not forecast significant adverse credit development in 2002. Further information is provided in notes 1, 12 and 13. F-25 ANNUAL REPORT PAGE 65 SELECTED FINANCIAL DATA
-------------------------------------------------- (Dollar amounts in millions; per-share amounts in dollars) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES Revenues $ 125,913 $129,853 $111,630 $100,469 $90,840 Earnings before accounting changes 14,128 12,735 10,717 9,296 8,203 Cumulative effect of accounting changes (444) -- -- -- -- Net earnings 13,684 12,735 10,717 9,296 8,203 Dividends declared 6,555 5,647 4,786 4,081 3,535 Earned on average share owners' equity excluding effect of accounting changes 27.1% 27.5% 26.8% 25.7% 25.0% Per share Earnings before accounting changes--diluted $ 1.41 $ 1.27 $ 1.07 $ 0.93 $ 0.82 Cumulative effect of accounting changes--diluted (0.04) -- -- -- -- Earnings--diluted 1.37 1.27 1.07 0.93 0.82 Earnings before accounting changes--basic 1.42 1.29 1.09 0.95 0.83 Cumulative effect of accounting changes--basic (0.04) -- -- -- -- Earnings--basic 1.38 1.29 1.09 0.95 0.83 Dividends declared 0.66 0.57 0.48 2/3 0.41 2/3 0.36 Stock price range 52.90 60.50 53.17 34.65 25.52 -28.25 -41.67 -31.42 -23.00 -15.98 Year-end closing stock price 40.08 47.94 51.58 34.00 24.46 Total assets 495,023 437,006 405,200 355,935 304,012 Long-term borrowings 79,806 82,132 71,427 59,663 46,603 Shares outstanding--average (in thousands) 9,932,245 9,897,110 9,833,478 9,806,995 9,824,075 Share owner accounts--average 625,000 597,000 549,000 534,000 509,000 ============================================================================================================== GE DATA Short-term borrowings $ 1,722 $ 940 $ 2,245 $ 3,466 $ 3,629 Long-term borrowings 787 841 722 681 729 Minority interest 948 968 823 816 569 Share owners' equity 54,824 50,492 42,557 38,880 34,438 -------------------------------------------------- Total capital invested $ 58,281 $ 53,241 $ 46,347 $ 43,843 $39,365 ================================================== Return on average total capital invested 27.0% 27.4% 25.8% 23.9% 23.6% Borrowings as a percentage of total capital invested excluding effect of accounting changes 4.3% 3.3% 6.4% 9.5% 11.1% Working capital (a) $ (2,398) $ 799 $ 3,922 $ 5,038 $ 5,990 Additions to property, plant and equipment 2,876 2,536 2,036 2,047 2,191 Employees at year end United States 125,000 131,000 124,000 125,000 128,000 Other countries 94,000 92,000 86,000 82,000 81,000 -------------------------------------------------- Total employees 219,000 223,000 210,000 207,000 209,000 ============================================================================================================== GECS DATA Revenues $ 58,353 $ 66,177 $ 55,749 $ 48,694 $39,931 Earnings before accounting changes 5,586 5,192 4,443 3,796 3,256 Cumulative effect of accounting changes (169) -- -- -- -- Net earnings 5,417 5,192 4,443 3,796 3,256 Share owner's equity 28,590 23,022 20,321 19,727 17,239 Minority interest 4,267 3,968 4,391 3,459 3,113 Borrowings from others 239,935 205,371 200,025 172,200 141,263 Ratio of debt to equity at GE Capital 7.31:1 7.53:1 8.44:1 7.86:1 7.45:1 Total assets $ 425,484 $370,636 $345,018 $303,297 $255,408 Insurance premiums written 15,843 16,461 13,624 11,865 9,396 Employees at year end United States (b) 33,000 37,000 43,000 38,000 37,000 Other countries 58,000 53,000 57,000 48,000 30,000 -------------------------------------------------- Total employees 91,000 90,000 100,000 86,000 67,000 ============================================================================================================== Transactions between GE and GECS have been eliminated from the consolidated information. (a) Working capital is defined as the sum of receivables from the sales of goods and services plus inventories less trade accounts payable and progress collections. (b) Excludes employees of Montgomery Ward in 1999.
F-26 ANNUAL REPORT PAGE 66 IMPAIRMENT OF INVESTMENT SECURITIES results in a charge to operations when a market decline below cost is other than temporary. Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market value, the duration of that market decline and the financial health of and specific prospects for the issuer. GECS investment securities amounted to approximately $100 billion at year-end 2001. Gross unrealized gains and losses included in that carrying amount related to debt securities were $1.9 billion and $2.3 billion, respectively. Gross unrealized gains and losses on equity securities were $0.2 billion and $0.4 billion, respectively. Of those securities whose carrying amount exceeds fair value at year-end 2001, and based on application of GE's accounting policy for impairment, approximately $600 million of portfolio value is at risk of being charged to earnings in 2002. GECS actively performs comprehensive market research, monitors market conditions and segments its investments by credit risk in order to minimize impairment risks. Further information is provided in notes 1 and 9 and on page 58, which discusses the investment securities portfolio. REVENUE RECOGNITION ON LONG-TERM AGREEMENTS to provide product services (product services agreements) requires estimates of profits over the entire terms of such agreements, considering factors such as the frequency and extent of future maintenance events, cost of personnel, material and other resources required to perform the services, and future cost changes. GE management routinely reviews estimates under product services agreements; such estimates are regularly revised to adjust for changes in outlook. Revisions that affect a product services agreement's total estimated profitability will also result in an immediate adjustment of earnings. Management regularly assesses customer credit risk inherent in the carrying amounts of contract costs and estimated earnings and provides for losses when they are incurred. Such carrying amounts for product services agreements in progress at December 31, 2001 and 2000, were $2.3 billion and $1.7 billion, respectively. Adjustments to earnings resulting from revisions to estimates on product services agreements have been insignificant for each of the years in the three-year period ended December 31, 2001. INSURANCE LIABILITIES AND RESERVES differ for short and long-duration insurance contracts. Short-duration contracts such as property and casualty policies are accounted for based on actuarial estimates of the amount of loss inherent in that period's claims, including losses for which claims have not yet been reported. Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. Measurement of long-duration insurance liabilities (such as term and whole life insurance policies) also is based on approved actuarial techniques, but necessarily includes assumptions about mortality, lapse rates and future yield on related investments. GECS insurance liabilities, reserves and annuity benefits totaled $114.2 billion at year-end 2001. Of that total, approximately $27.2 billion related to unpaid claims and claims adjustment expenses for short-duration insurance coverage. As discussed on page 56, there has been a recent shift in the source of adverse loss development away from property to liability coverage. Management continually evaluates the potential for changes in loss estimates, both positive and negative, and uses the results of these evaluations both to adjust recorded provisions and to adjust underwriting criteria and product offerings. The potential for further adverse loss development in these areas is highly uncertain. Further information about insurance liabilities is provided in note 19. OTHER LOSS CONTINGENCIES are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators. OTHER SIGNIFICANT ACCOUNTING POLICIES, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies related to revenue recognition, financial instruments and consolidation policy require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standards setters and regulators. Although no specific conclusions reached by these standard setters appear likely to cause a material change in GE's accounting policies, outcomes cannot be predicted with confidence. Also see note 1, Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by management when there are acceptable alternatives. F-27 ANNUAL REPORT PAGE 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION. The consolidated financial statements represent the adding together of all affiliates-companies that General Electric Company directly or indirectly controls. Results of associated companies-generally companies that are 20% to 50% owned and over which General Electric Company, directly or indirectly, has significant influence-are included in the financial statements on a "one-line" basis. FINANCIAL STATEMENT PRESENTATION. Financial data and related measurements are presented in the following categories: o GE. This represents the adding together of all affiliates other than General Electric Capital Services, Inc. (GECS), whose operations are presented on a one-line basis. o GECS. This affiliate owns all of the common stock of General Electric Capital Corporation (GE Capital) and GE Global Insurance Holdings Corporation (GE Global Insurance Holdings), the parent of Employers Reinsurance Corporation. GE Capital, GE Global Insurance Holdings and their respective affiliates are consolidated in the GECS columns and constitute its business. o CONSOLIDATED. This represents the adding together of GE and GECS. The effects of transactions among related companies within and between each of the above-mentioned groups are eliminated. Transactions between GE and GECS are not material. Certain prior-year amounts have been reclassified to conform to the 2001 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. SALES OF GOODS AND SERVICES. Sales of goods are recorded when a firm sales agreement is in place, delivery has occurred and collectibility of the fixed or determinable sales price is reasonably assured. Sales of services are recorded when performed in accordance with contracts. For long-term product services agreements, estimated profit rates are used to record sales as work is performed. Estimates are subject to change and may result in adjustments to margins. Losses, if any, are provided for when probable. For contracts that contain multiple products and/or services, amounts assigned to each component are based on its objectively determined fair value, such as the sales price for the component when it is sold separately or competitor prices for similar components. GECS REVENUES FROM SERVICES (EARNED INCOME). Income on all loans is recognized on the interest method. Accrual of interest income is suspended at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days delinquent. Interest income on impaired loans is recognized either as cash is collected or on a cost-recovery basis as conditions warrant. Financing lease income is recorded on the interest method so as to produce a level yield on funds not yet recovered. Estimated unguaranteed residual values of leased assets are based primarily on periodic independent appraisals of the values of leased assets remaining at expiration of the lease terms. Operating lease income is recognized on a straight-line basis over the terms of underlying leases. Origination, commitment and other nonrefundable fees related to fundings are deferred and recorded in earned income on the interest method. Commitment fees related to loans not expected to be funded and line-of-credit fees are deferred and recorded in earned income on a straight-line basis over the period to which the fees relate. Syndication fees are recorded in earned income at the time related services are performed unless significant contingencies exist. Income from investment and insurance activities is discussed on page 68. DEPRECIATION AND AMORTIZATION. The cost of most of GE's manufacturing plant and equipment is depreciated using an accelerated method based primarily on a sum-of-the-years digits formula. The cost of GECS equipment leased to others on operating leases is amortized, principally on a straight-line basis, to estimated residual value over the lease term or over the estimated economic life of the equipment. Depreciation of property and equipment used by GECS is recorded on either a sum-of-the-years digits formula or a straight-line basis over the lives of the assets. RECOGNITION OF LOSSES ON FINANCING RECEIVABLES. The allowance for losses on small-balance receivables reflects management's best estimate of probable losses inherent in the portfolio determined principally on the basis of historical experience. For other receivables, principally the larger loans and leases, the allowance for losses is determined primarily on the basis of management's best estimate of probable losses, including specific allowances for known troubled accounts. All accounts or portions thereof deemed to be uncollectible or to require an excessive collection cost are written off to the allowance for losses. Small-balance accounts generally are written off when 6 to 12 months delinquent, although any such balance judged to be uncollectible, such as an account in bankruptcy, is written down immediately to estimated realizable value. Large-balance accounts are reviewed at least quarterly, and those accounts with amounts that are judged to be uncollectible are written down to estimated realizable value. When collateral is repossessed in satisfaction of a loan, the receivable is written down against the allowance for losses to estimated fair value of the asset less costs to sell, transferred to other assets and subsequently carried at the lower of cost or estimated fair value less costs to sell. This accounting method has been employed principally for specialized financing transactions. F-28 ANNUAL REPORT PAGE 68 CASH AND EQUIVALENTS. Debt securities with original maturities of three months or less are included in cash equivalents unless designated as available for sale and classified as investment securities. INVESTMENT SECURITIES. Investments in debt and marketable equity securities are reported at fair value based primarily on quoted market prices or, if quoted prices are not available, discounted expected cash flows using market rates commensurate with credit quality and maturity of the investment. Substantially all investment securities are designated as available for sale, with unrealized gains and losses included in share owners' equity, net of applicable taxes and other adjustments. Investment securities are regularly reviewed for impairment based on criteria that include the extent to which cost exceeds market value, the duration of the market decline, and the financial health of and specific prospects for the issuer. Unrealized losses that are other than temporary are recognized in earnings. Realized gains and losses are accounted for on the specific identification method. INVENTORIES. All inventories are stated at the lower of cost or realizable values. Cost for virtually all of GE's U.S. inventories is determined on a last-in, first-out (LIFO) basis. Cost of other GE inventories is primarily determined on a first-in, first-out (FIFO) basis. GECS inventories consist primarily of finished products held for sale. Cost is primarily determined on a FIFO basis. INTANGIBLE ASSETS. Goodwill is amortized over its estimated period of benefit on a straight-line basis; other intangible assets are amortized on appropriate bases over their estimated lives. No amortization period exceeds 40 years. When an intangible asset exceeds associated expected operating cash flows, it is considered to be impaired and is written down to fair value, which is determined based on either discounted future cash flows or appraised values. GECS INSURANCE ACCOUNTING POLICIES. Accounting policies for GECS insurance businesses follow. PREMIUM INCOME. Insurance premiums are reported as earned income as follows: o For short-duration insurance contracts (including property and casualty, accident and health, and financial guaranty insurance), premiums are reported as earned income, generally on a pro-rata basis, over the terms of the related agreements. For retrospectively rated reinsurance contracts, premium adjustments are recorded based on estimated losses and loss expenses, taking into consideration both case and incurred-but-not-reported reserves. o For traditional long-duration insurance contracts (including term and whole life contracts and annuities payable for the life of the annuitant), premiums are reported as earned income when due. o For investment contracts and universal life contracts, premiums received are reported as liabilities, not as revenues. Universal life contracts are long-duration insurance contracts with terms that are not fixed and guaranteed; for these contracts, revenues are recognized for assessments against the policyholder's account, mostly for mortality, contract initiation, administration and surrender. Investment contracts are contracts that have neither significant mortality nor significant morbidity risk, including annuities payable for a determined period; for these contracts, revenues are recognized on the associated investments and amounts credited to policyholder accounts are charged to expense. DEFERRED POLICY ACQUISITION COSTS. Costs that vary with and are primarily related to the acquisition of new and renewal insurance and investment contracts are deferred and amortized over the respective policy terms. For short-duration insurance contracts, acquisition costs consist primarily of commissions, brokerage expenses and premium taxes. For long-duration insurance contracts, these costs consist primarily of first-year commissions in excess of recurring renewal commissions, certain variable sales expenses and certain support costs such as underwriting and policy issue expenses. o For short-duration insurance contracts, these costs are amortized pro rata over the contract periods in which the related premiums are earned. o For traditional long-duration insurance contracts, these costs are amortized over the respective contract periods in proportion to either anticipated premium income or, in the case of limited-payment contracts, estimated benefit payments. o For investment contracts and universal life contracts, these costs are amortized on the basis of anticipated gross profits. Periodically, deferred policy acquisition costs are reviewed for recoverability; anticipated investment income is considered in recoverability evaluations. PRESENT VALUE OF FUTURE PROFITS. The actuarially determined present value of anticipated net cash flows to be realized from insurance, annuity and investment contracts in force at the date of acquisition of life insurance enterprises is recorded as the present value of future profits and is amortized over the respective policy terms in a manner similar to deferred policy acquisition costs. Unamortized balances are adjusted to reflect experience and impairment, if any. ACCOUNTING CHANGES. At January 1, 2001, GE and GECS adopted Statement of Financial Accounting Standards (SFAS) 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended. Under SFAS 133, all derivative instruments (including certain derivative instruments embedded in other contracts) are F-29 ANNUAL REPORT PAGE 69 recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily in equity, then recognized in earnings along with the related effects of the hedged items. Any ineffective portion of hedges is reported in earnings as it occurs. Further information about derivatives and hedging is provided in note 29. The cumulative effect of adopting this accounting change at January 1, 2001, was as follows: Share owners' (In millions) Earnings (a) equity - -------------------------------------------------------------------------------- Adjustment to fair value of derivatives $(502) $(1,340) Income tax effects 178 513 ----- ------- Total $(324) $ (827) ================================================================================ The earnings per share effect was $0.03. (a) For earnings effect, amount shown is net of adjustment to hedged items. - -------------------------------------------------------------------------------- The cumulative effect on earnings comprised two significant elements. One element was associated with conversion option positions that were embedded in financing agreements, and the other was a portion of the effect of marking to market options and currency contracts used for hedging. The cumulative effect on share owners' equity was primarily attributable to marking to market forward and swap contracts used to hedge variable-rate borrowings. Decreases in the fair values of these instruments were attributable to declines in interest rates since inception of the hedging arrangements. As a matter of policy, GECS ensures that funding, including the effect of derivatives, of its lending and other financing asset positions are substantially matched in character (e.g., fixed vs. floating) and duration. As a result, declines in the fair values of these effective derivatives are offset by unrecognized gains on the related financing assets and hedged items, and future earnings will not be subject to volatility arising from interest rate changes. In November 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached a consensus on accounting for impairment of retained beneficial interests (EITF 99-20). Under this consensus, impairment of certain beneficial interests in securitized assets must be recognized when (1) the asset's fair value is below its carrying value, and (2) it is probable that there has been an adverse change in estimated cash flows. The cumulative effect of adopting EITF 99-20 at January 1, 2001, was a one-time reduction of net earnings of $120 million ($0.01 per share). These accounting changes did not involve cash, and management expects that they will have no more than a modest effect on future results. 2 GE OTHER INCOME (In millions) 2001 2000 1999 ----- ----- ----- Residual licensing and royalty income $ 75 $ 65 $ 67 Associated companies (106) (111) (1) Marketable securities and bank deposits 184 55 105 Customer financing 11 22 17 Other items 269 467 668 ----- ----- ----- $ 433 $ 498 $ 856 ================================================================================ Other income in 1999 included a gain of $388 million related to the contribution of certain of NBC's media properties to NBC Internet (NBCi), a former publicly-traded company, in exchange for a noncontrolling interest in NBCi. Assets contributed by NBC included its 100% interest in NBC.com, NBC-IN.com and VideoSeeker.com as well as a 10% interest in a fourth property, CNBC.com. 3 GECS REVENUES FROM SERVICES (In millions) 2001 2000 1999 ------- ------- ------- Time sales, loan and other income (a) $22,150 $22,326 $18,209 Operating lease rentals 6,088 6,183 6,022 Financing leases 4,261 3,688 3,587 Investment income 6,593 8,479 6,243 Premium and commission income of insurance businesses 15,634 16,093 12,948 ------- ------- ------- $54,726 $56,769 $47,009 ================================================================================ (a) Includes gains on sales of financial assets through securitizations of $1,327 million in 2001, compared with $489 million in 2000, which was approximately the same as the 1999 amount. - -------------------------------------------------------------------------------- F-30 ANNUAL REPORT PAGE 70 For insurance businesses, the effects of reinsurance on premiums written and premium and commission income were as follows: (In millions) 2001 2000 1999 -------- -------- -------- PREMIUMS WRITTEN Direct $ 9,958 $ 9,390 $ 7,382 Assumed 9,603 9,552 8,520 Ceded (3,718) (2,481) (2,278) -------- -------- -------- $ 15,843 $ 16,461 $ 13,624 -------- -------- -------- PREMIUM AND COMMISSION INCOME Direct $ 9,912 $ 9,026 $ 7,002 Assumed 9,471 9,643 8,460 Ceded (3,749) (2,576) (2,514) -------- -------- -------- $ 15,634 $ 16,093 $ 12,948 ================================================================================ Reinsurance recoveries recognized as a reduction of insurance losses and policyholder and annuity benefits amounted to $5,863 million, $3,232 million and $2,648 million for the years ended December 31, 2001, 2000 and 1999, respectively. 4 SUPPLEMENTAL COST INFORMATION Total expenditures for research and development were $2,349 million, $2,193 million and $2,017 million in 2001, 2000 and 1999, respectively. The Company-funded portion aggregated $1,980 million in 2001, $1,867 million in 2000 and $1,667 million in 1999. Rental expense under operating leases is shown below. (In millions) 2001 2000 1999 ----- ----- ----- GE $ 694 $ 648 $ 607 GECS 1,006 1,176 1,067 ================================================================================ At December 31, 2001, minimum rental commitments under noncancelable operating leases aggregated $2,608 million and $5,179 million for GE and GECS, respectively. Amounts payable over the next five years follow. (In millions) 2002 2003 2004 2005 2006 ---- ---- ---- ---- ---- GE $519 $410 $328 $277 $228 GECS 997 680 601 636 407 ================================================================================ GE's selling, general and administrative expense totaled $8,637 million in 2001, $8,392 million in 2000 and $7,732 million in 1999. Insignificant amounts of interest were capitalized by GE and GECS in 2001, 2000 and 1999. 5 RETIREE HEALTH AND LIFE BENEFITS GE and its affiliates sponsor a number of retiree health and life insurance benefit plans (retiree benefit plans). Principal retiree benefit plans are discussed below; other such plans are not significant individually or in the aggregate. PRINCIPAL RETIREE BENEFIT PLANS generally provide health and life insurance benefits to employees who retire under the GE Pension Plan (see note 6) with 10 or more years of service. Retirees share in the cost of healthcare benefits. Benefit provisions are subject to collective bargaining. These plans cover approximately 250,000 retirees and dependents. The effect on operations of principal retiree benefit plans is shown in the following table. EFFECT ON OPERATIONS (In millions) 2001 2000 1999 ----- ----- ----- Expected return on plan assets $(185) $(178) $(165) Service cost for benefits earned 191 165 107 Interest cost on benefit obligation 459 402 323 Prior service cost 90 49 8 Net actuarial loss recognized 60 40 45 ----- ----- ----- Total cost $ 615 $ 478 $ 318 ================================================================================ FUNDING POLICY for retiree health benefits is generally to pay covered expenses as they are incurred. GE funds retiree life insurance benefits at its discretion. Changes in the accumulated postretirement benefit obligation for retiree benefit plans follow. ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (APBO) (In millions) 2001 2000 ------- ------- Balance at January 1 $ 6,422 $ 4,926 Service cost for benefits earned 191 165 Interest cost on benefit obligation 459 402 Participant contributions 30 25 Plan amendments -- 948 Actuarial loss 287 534 Benefits paid (593) (578) ------- ------- Balance at December 31 (a) $ 6,796 $ 6,422 ================================================================================ (a) The APBO for the health plans was $4,965 million and $4,688 million at year-end 2001 and 2000, respectively. - -------------------------------------------------------------------------------- F-31 ANNUAL REPORT PAGE 71 Changes in the fair value of assets for retiree benefit plans follow. FAIR VALUE OF ASSETS (In millions) 2001 2000 ------- ------- Balance at January 1 $ 2,031 $ 2,369 Actual return on plan assets (163) (85) Employer contributions 466 300 Participant contributions 30 25 Benefits paid (593) (578) ------- ------- Balance at December 31 $ 1,771 $ 2,031 ================================================================================ Plan assets are held in trust and consist mainly of common stock and fixed-income investments. GE common stock represented 6.4% and 6.9% of trust assets at year-end 2001 and 2000, respectively. GE recorded assets and liabilities for retiree benefit plans are as follows: RETIREE BENEFIT ASSET/(LIABILITY) December 31 (In millions) 2001 2000 ------- ------- Funded status (a) $(5,025) $(4,391) Unrecognized prior service cost 909 999 Unrecognized net actuarial loss 1,393 818 ------- -------- Net liability recognized $(2,723) $(2,574) ======= ======== Amounts recorded in the Statement of Financial Position: Prepaid retiree life plans asset $ 66 $ 8 Retiree health plans liability (2,789) (2,582) ------- -------- Net liability recognized $(2,723) $(2,574) ================================================================================ (a) Fair value of assets less APBO, as shown in the preceding tables. - -------------------------------------------------------------------------------- ACTUARIAL ASSUMPTIONS used to determine costs and benefit obligations for principal retiree benefit plans follow. ACTUARIAL ASSUMPTIONS December 31 2001 2000 1999 ---- ---- ---- Discount rate 7.25% 7.5% 7.75% Compensation increases 5.0 5.0 5.0 Healthcare cost trend (a) 11.6 10.0 9.0 Return on assets for the year (b) 9.5 9.5 9.5 ================================================================================ (a) For 2001, gradually declining to 5.0% after 2009. (b) For 2002, the return on assets actuarial assumption will be 8.5%. - -------------------------------------------------------------------------------- Increasing or decreasing the healthcare cost trend rates by one percentage point would have had an insignificant effect on the December 31, 2001, accumulated postretirement benefit obligation and the annual cost of retiree health plans. Experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, are amortized over the average future service period of employees. 6 PENSION BENEFITS GE and its affiliates sponsor a number of pension plans. Principal pension plans are discussed below; other pension plans are not significant individually or in the aggregate. PRINCIPAL PENSION PLANS are the GE Pension Plan and the GE Supplementary Pension Plan. The GE Pension Plan provides benefits to certain U.S. employees based on the greater of a formula recognizing career earnings or a formula recognizing length of service and final average earnings. Benefit provisions are subject to collective bargaining. The GE Pension Plan covers approximately 503,000 participants, including 141,000 employees, 164,000 former employees with vested rights to future benefits, and 198,000 retirees and beneficiaries receiving benefits. The GE Supplementary Pension Plan is a pay-as-you-go plan providing supplementary retirement benefits primarily to higher-level, longer-service U.S. employees. Details of the effect on operations of principal pension plans, and the total effect on cost of postretirement benefit plans, follow. EFFECT ON OPERATIONS (In millions) 2001 2000 1999 ------- ------- ------- Expected return on plan assets $ 4,327 $ 3,754 $ 3,407 Service cost for benefits earned (a) (884) (780) (693) Interest cost on benefit obligation (2,065) (1,966) (1,804) Prior service cost (244) (237) (151) SFAS 87 transition gain -- 154 154 Net actuarial gain recognized 961 819 467 ------- ------- ------- Income from pensions 2,095 1,744 1,380 ------- ------- ------- Retiree benefit plans cost (note 5) (615) (478) (318) ------- ------- ------- Net cost reductions from postretirement benefit plans $ 1,480 $ 1,266 $ 1,062 ================================================================================ (a) Net of participant contributions. - -------------------------------------------------------------------------------- FUNDING POLICY for the GE Pension Plan is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as GE may determine to be appropriate. GE has not made contributions to the GE Pension Plan since 1987 because the fully funded status of the Plan precludes a current tax deduction and because any GE contribution would require payment of excise taxes. F-32 ANNUAL REPORT PAGE 72 Changes in the projected benefit obligation for principal pension plans follow. PROJECTED BENEFIT OBLIGATION (PBO) (In millions) 2001 2000 -------- -------- Balance at January 1 $ 28,535 $ 25,522 Service cost for benefits earned (a) 884 780 Interest cost on benefit obligation 2,065 1,966 Participant contributions 141 140 Plan amendments -- 1,155 Actuarial loss (b) 889 970 Benefits paid (2,091) (1,998) -------- -------- Balance at December 31 $ 30,423 $ 28,535 ================================================================================ (a) Net of participant contributions. (b) Principally associated with discount rate changes. - -------------------------------------------------------------------------------- Changes in the fair value of assets for principal pension plans follow. FAIR VALUE OF ASSETS (In millions) 2001 2000 -------- -------- Balance at January 1 $ 49,757 $ 50,243 Actual return on plan assets (2,876) 1,287 Employer contributions 75 85 Participant contributions 141 140 Benefits paid (2,091) (1,998) -------- -------- Balance at December 31 $ 45,006 $ 49,757 ================================================================================ Plan assets are held in trust and consist mainly of common stock and fixed-income investments. GE common stock represented 8.6% and 9.2% of trust assets at year-end 2001 and 2000, respectively. GE recorded assets and liabilities for principal pension plans are as follows: PREPAID PENSION ASSET/(LIABILITY) December 31 (In millions) 2001 2000 -------- -------- Funded status (a) $ 14,583 $ 21,222 Unrecognized prior service cost 1,373 1,617 Unrecognized net actuarial gain (3,541) (12,594) -------- -------- Net asset recognized $ 12,415 $ 10,245 ======== ======== Amounts recorded in the Statement of Financial Position: Prepaid pension asset $ 13,740 $ 11,377 Supplementary Pension Plan liability (1,325) (1,132) -------- -------- Net asset recognized $ 12,415 $ 10,245 ================================================================================ (a) Fair value of assets less PBO, as shown in the preceding tables. - -------------------------------------------------------------------------------- ACTUARIAL ASSUMPTIONS used to determine costs and benefit obligations for principal pension plans follow. ACTUARIAL ASSUMPTIONS December 31 2001 2000 1999 ---- ---- ---- Discount rate 7.25% 7.5% 7.75% Compensation increases 5.0 5.0 5.0 Return on assets for the year (a) 9.5 9.5 9.5 ================================================================================ (a) For 2002, the return on assets actuarial assumption will be 8.5%. - -------------------------------------------------------------------------------- Experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions, are amortized over the average future service period of employees. F-33 ANNUAL REPORT PAGE 73 7 PROVISION FOR INCOME TAXES (In millions) 2001 2000 1999 ------ ------ ------ GE Current tax expense $3,632 $3,331 $2,555 Deferred tax expense from temporary differences 561 468 652 ------ ------ ------ 4,193 3,799 3,207 ------ ------ ------ GECS Current tax expense 517 1,229 806 Deferred tax expense from temporary differences 863 683 847 ------ ------ ------ 1,380 1,912 1,653 ------ ------ ------ CONSOLIDATED Current tax expense 4,149 4,560 3,361 Deferred tax expense from temporary differences 1,424 1,151 1,499 ------ ------ ------ $5,573 $5,711 $4,860 ================================================================================ GE includes GECS in filing a consolidated U.S. federal income tax return. The GECS provision for current tax expense includes its effect on the consolidated return. Consolidated current tax expense includes amounts applicable to U.S. federal income taxes of $2,514 million, $3,005 million and $1,632 million in 2001, 2000 and 1999, respectively, and amounts applicable to non-U.S. jurisdictions of $1,225 million, $1,246 million and $1,399 million in 2001, 2000 and 1999, respectively. Consolidated deferred tax expense related to U.S. federal income taxes was $1,455 million, $1,095 million and $1,475 million in 2001, 2000 and 1999, respectively. Deferred income tax balances reflect the impact of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. See note 21 for details. Except for certain earnings that GE intends to reinvest indefinitely, provision has been made for the estimated U.S. federal income tax liabilities applicable to undistributed earnings of affiliates and associated companies. It is not practicable to determine the U.S. federal income tax liability, if any, that would be payable if such earnings were not reinvested indefinitely. Consolidated U.S. income before taxes and cumulative effect of accounting changes was $13.9 billion in 2001, $12.9 billion in 2000 and $11.3 billion in 1999. The corresponding amounts for non-U.S.-based operations were $5.8 billion in 2001, $5.5 billion in 2000 and $4.3 billion in 1999. A reconciliation of the U.S. federal statutory tax rate to the actual tax rate is provided below. RECONCILIATION OF U.S. FEDERAL STATUTORY TAX RATE TO ACTUAL RATE
CONSOLIDATED GE GECS ------------------------- ---------------------- ---------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% Increase (reduction) in rate resulting from: Inclusion of after-tax earnings of GECS in before-tax earnings of GE -- -- -- (10.7) (11.0) (11.2) -- -- -- Amortization of goodwill 1.0 1.1 1.1 0.8 0.7 0.8 0.9 1.1 1.0 Tax-exempt income (1.3) (1.5) (1.7) -- -- -- (3.8) (4.0) (4.4) Tax on international activities including exports (5.4) (4.9) (4.2) (3.2) (3.0) (2.6) (6.7) (5.8) (4.8) Americom/Rollins goodwill (1.1) -- -- -- -- -- (3.2) -- -- All other-net 0.1 1.3 1.0 1.0 1.3 1.0 (2.4) 0.6 0.3 ---- ---- ---- ---- ---- ---- ---- ---- ---- (6.7) (4.0) (3.8) (12.1) (12.0) (12.0) (15.2) (8.1) (7.9) ---- ---- ---- ---- ---- ---- ---- ---- ---- Actual income tax rate 28.3% 31.0% 31.2% 22.9% 23.0% 23.0% 19.8% 26.9% 27.1% ===============================================================================================================================
F-34 ANNUAL REPORT PAGE 74 8 EARNINGS PER SHARE INFORMATION
2001 2000 1999 ------------------ ---------------- ---------------- (In millions; per-share amounts in dollars) Diluted Basic Diluted Basic Diluted Basic - ---------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS Earnings before accounting changes $ 14,128 $ 14,128 $12,735 $12,735 $10,717 $10,717 Dividend equivalents-net of tax 12 -- 11 -- 8 -- -------- -------- ------- ------- ------- ------- Earnings before accounting changes for per-share calculation 14,140 14,128 12,746 12,735 10,725 10,717 Cumulative effect of accounting changes (444) (444) -- -- -- -- -------- -------- ------- ------- ------- ------- Net earnings available for per-share calculation $ 13,696 $ 13,684 $12,746 $12,735 $10,725 $10,717 -------- -------- ------- ------- ------- ------- AVERAGE EQUIVALENT SHARES Shares of GE common stock outstanding 9,932 9,932 9,897 9,897 9,833 9,833 Employee compensation-related shares, including stock options 120 -- 160 -- 163 -- -------- -------- ------- ------- ------- ------- Total average equivalent shares 10,052 9,932 10,057 9,897 9,996 9,833 -------- -------- ------- ------- ------- ------- PER-SHARE AMOUNTS Earnings before accounting changes $ 1.41 $ 1.42 $ 1.27 $ 1.29 $ 1.07 $ 1.09 Cumulative effect of accounting changes (0.04) (0.04) -- -- -- -- -------- -------- ------- ------- ------- ------- Net earnings per share $ 1.37 $ 1.38 $ 1.27 $ 1.29 $ 1.07 $ 1.09 ==========================================================================================================
9 INVESTMENT SECURITIES
2001 2000 ------------------------------------------ ------------------------------------------- Gross Gross Gross Gross Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated cost gains losses fair value cost gains losses fair value -------- ---------- ---------- ---------- --------- ---------- ---------- ---------- GE SECURITIES Debt-U.S. corporate $ 350 $ 99 $ -- $ 449 $ 364 $ 209 $ -- $ 573 Equity 412 47 (29) 430 316 266 (146) 436 -------- ------- --------- -------- ------- ------- -------- ------- 762 146 (29) 879 680 475 (146) 1,009 -------- ------- --------- -------- ------- ------- -------- ------- GECS SECURITIES Debt U.S. corporate 47,391 880 (1,626) 46,645 39,078 459 (1,282) 38,255 State and municipal 12,518 180 (136) 12,562 13,272 499 (139) 13,632 Mortgage-backed 16,442 424 (90) 16,776 13,683 323 (160) 13,846 Corporate-non-U.S 13,088 232 (277) 13,043 12,640 374 (168) 12,846 Government-non-U.S 6,104 183 (124) 6,163 5,059 104 (108) 5,055 U.S. government and federal agency 1,233 25 (32) 1,226 2,106 15 (42) 2,079 Equity 3,926 178 (381) 3,723 4,392 703 (478) 4,617 -------- ------- --------- -------- ------- ------- -------- ------- 100,702 2,102 (2,666) 100,138 90,230 2,477 (2,377) 90,330 -------- ------- --------- -------- ------- ------- -------- ------- $101,464 $ 2,248 $ (2,695) $101,017 $90,910 $ 2,952 $ (2,523) $91,339 ================================================================================================================ A substantial portion of mortgage-backed securities shown in the table above are collateralized by U.S. residential mortgages. - ----------------------------------------------------------------------------------------------------------------
F-35 ANNUAL REPORT PAGE 75 CONTRACTUAL MATURITIES OF GECS INVESTMENT IN DEBT SECURITIES (EXCLUDING MORTGAGE-BACKED SECURITIES) Amortized Estimated (In millions) cost fair value --------- ---------- Due in 2002 $ 5,184 $ 5,244 2003-2006 17,382 17,293 2007-2011 20,858 20,600 2012 and later 36,910 36,502 ================================================================================ It is expected that actual maturities will differ from contractual maturities because borrowers have the right to call or prepay certain obligations. - -------------------------------------------------------------------------------- Supplemental information about gross realized gains and losses of investment securities follows. (In millions) 2001 2000 1999 ------- ------- ------- GE Gains $ 236 $ 8 $ 24 Losses (100) (76) -- ------- ------- ------- Net 136 (68) 24 ------- ------- ------- GECS Gains (a) 1,800 3,581 1,406 Losses (838) (714) (484) ------- ------- ------- Net 962 2,867 922 ------- ------- ------- $ 1,098 $ 2,799 $ 946 ================================================================================ (a) Includes $1,366 million, in 2000, from the sale of GECS investment in common stock of Paine Webber Group, Inc. Proceeds from securities sales amounted to $39,950 million in 2001, $24,748 million in 2000 and $18,521 million in 1999. - -------------------------------------------------------------------------------- 10 GE CURRENT RECEIVABLES December 31 (In millions) 2001 2000 -------- -------- Aircraft Engines $ 1,976 $ 1,840 Appliances 341 327 Industrial Products and Systems 1,140 1,246 Materials 1,008 1,126 NBC 335 384 Power Systems 3,587 3,668 Technical Products and Services 1,341 1,128 Corporate items and eliminations 439 358 -------- -------- 10,167 10,077 Less allowance for losses (362) (350) -------- -------- $ 9,805 $ 9,727 ================================================================================ Receivables balances at December 31, 2001 and 2000, before allowance for losses, included $5,893 million and $6,323 million, respectively, from sales of goods and services to customers, and $447 million and $233 million, respectively, from transactions with associated companies. Current receivables of $270 million at year-end 2001 and $227 million at year-end 2000 arose from sales, principally of aircraft engine goods and services, on open account to various agencies of the U.S. government, which is GE's largest single customer. About 4%, 3% and 4% of GE's sales of goods and services were to the U.S. government in 2001, 2000 and 1999, respectively. 11 INVENTORIES December 31 (In millions) 2001 2000 ------- ------- GE Raw materials and work in process $ 4,708 $ 4,134 Finished goods 3,951 3,614 Unbilled shipments 312 243 ------- ------- 8,971 7,991 Less revaluation to LIFO (676) (845) ------- ------- 8,295 7,146 ------- ------- GECS Finished goods 270 666 ------- ------- $ 8,565 $ 7,812 ================================================================================ LIFO revaluations decreased $169 million in 2001, compared with decreases of $82 million in 2000 and $84 million in 1999. Included in these changes were decreases of $8 million, $6 million and $4 million in 2001, 2000 and 1999, respectively, that resulted from lower LIFO inventory levels. There were net cost decreases in each of the last three years. As of December 31, 2001, GE is obligated to acquire certain raw materials at market prices through the year 2016 under various take-or-pay or similar arrangements. Annual minimum commitments under these arrangements are insignificant. F-36 ANNUAL REPORT PAGE 76 12 GECS FINANCING RECEIVABLES (INVESTMENTS IN TIME SALES, LOANS AND FINANCING LEASES) December 31 (In millions) 2001 2000 --------- --------- TIME SALES AND LOANS Consumer services $ 45,741 $ 43,954 Specialized financing 16,913 14,567 Mid-market financing 57,600 35,436 Equipment management 2,391 1,385 Other 41 928 --------- --------- 122,686 96,270 --------- --------- INVESTMENT IN FINANCING LEASES Direct financing leases 49,412 46,186 Leveraged leases 6,735 4,877 --------- --------- 56,147 51,063 --------- --------- 178,833 147,333 Less allowance for losses (note 13) (4,801) (4,034) --------- --------- $ 174,032 $ 143,299 ================================================================================ Time sales and loans represents transactions in a variety of forms, including time sales, revolving charge and credit, mortgages, installment loans, intermediate-term loans and revolving loans secured by business assets. The portfolio includes time sales and loans carried at the principal amount on which finance charges are billed periodically, and time sales and loans carried at gross book value, which includes finance charges. At year-end 2001 and 2000, commercial real estate loans and leases of $25,466 million and $21,329 million, respectively, were included in either financing receivables or GECS insurance receivables. Note 17 contains information on airline loans and leases. Investment in financing leases consists of direct financing and leveraged leases of aircraft, railroad rolling stock, autos, other transportation equipment, data processing equipment and medical equipment, as well as other manufacturing, power generation, commercial real estate, and commercial equipment and facilities. As the sole owner of assets under direct financing leases and as the equity participant in leveraged leases, GECS is taxed on total lease payments received and is entitled to tax deductions based on the cost of leased assets and tax deductions for interest paid to third-party participants. GECS is generally entitled to any residual value of leased assets. Investment in direct financing and leveraged leases represents net unpaid rentals and estimated unguaranteed residual values of leased equipment, less related deferred income. GECS has no general obligation for principal and interest on notes and other instruments representing third-party participation related to leveraged leases; such notes and other instruments have not been included in liabilities but have been offset against the related rentals receivable. The GECS share of rentals receivable on leveraged leases is subordinate to the share of other participants who also have security interests in the leased equipment. NET INVESTMENT IN FINANCING LEASES
Total Direct financing leases financing leases Leveraged leases ------------------- ------------------- ------------------- December 31 (In millions) 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- Total minimum lease payments receivable $ 83,316 $ 74,960 $ 53,870 $ 50,556 $ 29,446 $ 24,404 Less principal and interest on third-party nonrecourse debt (22,588) (19,773) -- -- (22,588) (19,773) -------- -------- -------- -------- -------- -------- Net rentals receivable 60,728 55,187 53,870 50,556 6,858 4,631 Estimated unguaranteed residual value of leased assets 8,996 7,314 5,544 4,602 3,452 2,712 Less deferred income (13,577) (11,438) (10,002) (8,972) (3,575) (2,466) -------- -------- -------- -------- -------- -------- INVESTMENT IN FINANCING LEASES (AS SHOWN ABOVE) 56,147 51,063 49,412 46,186 6,735 4,877 Less amounts to arrive at net investment Allowance for losses (679) (646) (606) (558) (73) (88) Deferred taxes (9,168) (8,408) (4,643) (4,496) (4,525) (3,912) -------- -------- -------- -------- -------- -------- NET INVESTMENT IN FINANCING LEASES $ 46,300 $ 42,009 $ 44,163 $ 41,132 $ 2,137 $ 877 ===========================================================================================================
F-37 ANNUAL REPORT PAGE 77 CONTRACTUAL MATURITIES Total time sales Net rentals (In millions) and loans (a) receivable (a) ----------------- -------------- Due in 2002 $ 39,162 $15,303 2003 22,585 13,116 2004 19,723 9,057 2005 10,247 6,284 2006 7,729 3,520 2007 and later 23,240 13,448 - -------------------------------------------------------------------------------- Total $122,686 $60,728 ================================================================================ (a) Experience has shown that a substantial portion of receivables will be paid prior to contractual maturity, and these amounts should not be regarded as forecasts of future cash flows. - -------------------------------------------------------------------------------- Nonearning consumer receivables were $1,540 million and $1,139 million at December 31, 2001 and 2000, respectively, a substantial amount of which were private-label credit card loans. Nonearning and reduced-earning receivables other than consumer receivables were $1,734 million and $949 million at year-end 2001 and 2000, respectively. "Impaired" loans are defined by generally accepted accounting principles as large balance loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. An analysis of impaired loans follows. December 31 (In millions) 2001 2000 ------ ---- Loans requiring allowance for losses $1,041 $475 Loans expected to be fully recoverable 574 384 ------ ---- $1,615(a) $859 ====== ==== Allowance for losses $ 422 $166 Average investment during year 1,121 801 Interest income earned while impaired (b) 17 20 ================================================================================ (a) Includes $408 million of loans classified as impaired by Heller Financial, Inc., which was acquired in October 2001. (b) Recognized principally on cash basis. - -------------------------------------------------------------------------------- 13 GECS ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES (In millions) 2001 2000 1999 ------- ------- ------- Balance at January 1 $ 4,034 $ 3,708 $ 3,223 Provisions charged to operations 2,481 2,045 1,671 Net transfers primarily related to acquisitions and sales 564 22 271 Amounts written off-net (2,278) (1,741) (1,457) ------- ------- ------- Balance at December 31 $ 4,801 $ 4,034 $ 3,708 ================================================================================ 14 GECS INSURANCE RECEIVABLES At year-end 2001 and 2000, GECS insurance receivables included reinsurance recoverables of $12,606 million and $8,240 million and receivables at insurance affiliates of $14,711 million and $15,562 million, respectively. Receivables at insurance affiliates include premium receivables, investments in whole real estate and other loans, policy loans and funds on deposit with reinsurers. F-38 ANNUAL REPORT PAGE 78 15 PROPERTY, PLANT AND EQUIPMENT (INCLUDING EQUIPMENT LEASED TO OTHERS) December 31 (In millions) 2001 2000 ------- ------- ORIGINAL COST GE Land and improvements $ 577 $ 544 Buildings, structures and related equipment 7,281 6,982 Machinery and equipment 21,414 20,792 Leasehold costs and manufacturing plant under construction 1,960 1,871 ------- ------- 31,232 30,189 ------- ------- GECS Buildings and equipment 3,600 5,753 Equipment leased to others Aircraft 16,173 12,888 Vehicles 10,779 9,872 Railroad rolling stock 3,439 3,459 Marine shipping containers 1,618 2,196 Mobile and modular structures 1,325 1,288 Information technology equipment 1,321 1,069 Construction and manufacturing equipment 799 591 Scientific, medical and other equipment 1,001 685 ------- ------- 40,055 37,801 ------- ------- $71,287 $67,990 ======= ======= ACCUMULATED DEPRECIATION AND AMORTIZATION GE $18,433 $17,990 GECS Buildings and equipment 1,579 2,084 Equipment leased to others 9,135 7,901 ------- ------- $29,147 $27,975 ================================================================================ Amortization of GECS equipment leased to others was $2,958 million, $2,620 million and $2,673 million in 2001, 2000 and 1999, respectively. Noncancelable future rentals due from customers for equipment on operating leases at year-end 2001 totaled $16,072 million and are due as follows: $3,954 million in 2002; $3,183 million in 2003; $2,396 million in 2004; $1,749 million in 2005; $1,245 million in 2006; and $3,545 million thereafter. 16 INTANGIBLE ASSETS December 31 (In millions) 2001 2000 ------- ------- GE Goodwill $12,354 $11,962 Other intangibles 578 462 ------- ------- 12,932 12,424 ------- ------- GECS Goodwill 15,933 11,550 Present value of future profits (PVFP) 2,198 2,780 Other intangibles 586 687 ------- ------- 18,717 15,017 ------- ------- $31,649 $27,441 ================================================================================ GE intangible assets are net of accumulated amortization of $3,854 million in 2001 and $3,413 million in 2000. GECS intangible assets are net of accumulated amortization of $6,954 million in 2001 and $5,815 million in 2000. - -------------------------------------------------------------------------------- The amount of goodwill amortization included in net earnings (net of income taxes) in 2001, 2000 and 1999 was $499 million, $439 million and $395 million for GE and $552 million, $620 million and $512 million for GECS, respectively. PVFP amortization, which is on an accelerated basis and net of interest, is projected to range from 13% to 6% of the year-end 2001 unamortized balance for each of the next five years. F-39 ANNUAL REPORT PAGE 79 17 ALL OTHER ASSETS December 31 (In millions) 2001 2000 -------- -------- GE Investments Associated companies (a) $ 2,539 $ 2,670 Other 1,336 1,888 -------- -------- 3,875 4,558 Prepaid pension asset 13,740 11,377 Contract costs and estimated earnings 2,292 1,736 Prepaid broadcasting rights 1,108 967 Long-term receivables, including notes 909 1,987 Derivative instruments (b) 254 83 Other 3,808 3,320 -------- -------- 25,986 24,028 -------- -------- GECS Investments Associated companies (a) 14,415 12,785 Real estate 8,141 6,496 Assets acquired for resale 1,725 1,394 Other 5,222 5,207 -------- -------- 29,503 25,882 Separate accounts 10,403 11,705 Deferred insurance acquisition costs 6,768 5,815 Derivative instruments (b) 2,066 314 Servicing assets (c) 1,139 1,449 Other 5,209 5,201 -------- -------- 55,088 50,366 -------- -------- ELIMINATIONS (548) (507) -------- -------- $ 80,526 $ 73,887 ================================================================================ (a) Includes advances to associated companies which are non-controlled, non-consolidated equity investments. (b) Amounts at December 31, 2001, are stated at fair value in accordance with SFAS 133; corresponding amounts at December 31, 2000, are stated at amortized cost. See note 29 for a discussion of the types and uses of derivative instruments. (c) Associated primarily with serviced residential mortgage loans amounting to $59 billion and $81 billion at December 31, 2001 and 2000, respectively. - -------------------------------------------------------------------------------- In line with industry practice, sales of commercial jet aircraft engines often involve long-term customer financing commitments. In making such commitments, it is GE's general practice to require that it have or be able to establish a secured position in the aircraft being financed. Under such airline financing programs, GE had issued guarantees amounting to $1,181 million at year-end 2001 and $1,160 million at year-end 2000; and it had entered into commitments totaling $1,497 million and $1,476 million at year-end 2001 and 2000, respectively, to provide financial assistance on future aircraft engine sales. Net of reserves, the estimated fair values of the aircraft securing these guarantees exceeded the related guaranteed amounts at December 31, 2001. GECS acts as a lender and lessor to the commercial airline industry. At December 31, 2001 and 2000, the balance of such GECS loans and leases was $21.5 billion and $15.3 billion, respectively. In addition, at December 31, 2001, GECS had issued financial guarantees and funding commitments of $0.9 billion ($0.6 billion at year-end 2000), credit and liquidity support agreements to special purpose entities sponsored by GECS of $0.9 billion ($0.6 billion at year-end 2000) and had placed multi-year orders for various Boeing, Airbus and other aircraft with list prices of approximately $19.9 billion ($22.9 billion at year-end 2000). At year-end 2001, the National Broadcasting Company had $6,646 million of commitments to acquire broadcast material and the rights to broadcast television programs, including U.S. television rights to future Olympic Games, and commitments under long-term television station affiliation agreements that require payments through the year 2010. In connection with numerous projects, primarily power generation bids and contracts, GE had issued various bid and performance bonds and guarantees totaling $3,704 million at year-end 2001 and $4,599 million at year-end 2000. Separate accounts represent investments controlled by policyholders and are associated with identical amounts reported as insurance liabilities in note 19. F-40 ANNUAL REPORT PAGE 80 18 BORROWINGS SHORT-TERM BORROWINGS 2001 2000 ---------------------- ---------------------- December 31 Average Average (In millions) Amount rate (a) Amount rate (a) - -------------------------------------------------------------------------------- GE Commercial paper Non-U.S $ 266 3.87% $ 172 5.77% Payable to banks, principally non-U.S 1,160 5.58 527 11.30 Current portion of long-term debt 80 6.46 71 7.90 Other 216 170 -------- -------- 1,722 940 -------- -------- GECS Commercial paper U.S 100,170 2.21 77,525 6.67 Non-U.S 17,289 3.36 16,965 5.46 Current portion of long-term debt 30,952 5.08 19,283 5.95 Other 12,590 10,219 -------- -------- 161,001 123,992 -------- -------- Foreign currency loss (b) (157) -- -------- -------- 160,844 123,992 -------- -------- ELIMINATIONS (9,490) (5,752) -------- -------- $153,076 $119,180 ================================================================================ LONG-TERM BORROWINGS 2001 December 31 Average (In millions) rate (a) Maturities 2001 2000 -------- ---------- ---- ---- GE Industrial development/ pollution control bonds 2.53% 2003-2027 $ 336 $ 334 Payable to banks, principally non-U.S. 5.36 2003-2007 241 255 Other (c) 210 252 -------- ------- 787 841 -------- ------- GECS Senior notes 4.89 2003-2055 78,347 80,383 Subordinated notes (d) 7.74 2006-2035 1,171 996 -------- ------- 79,518 81,379 -------- ------- Foreign currency loss (b) (427) -- -------- ------- 79,091 81,379 -------- ------- ELIMINATIONS (72) (88) -------- ------- $ 79,806 $82,132 ================================================================================ (a) Based on year-end balances and year-end local currency interest rates, including the effects of interest rate and currency swaps, if any, directly associated with the original debt issuance. (b) Total GECS borrowings in 2001 exclude the foreign exchange effects of related currency swaps in accordance with the provisions of SFAS 133. (c) A variety of obligations having various interest rates and maturities, including certain borrowings by parent operating components and affiliates. (d) At year-end 2001 and 2000, $996 million of subordinated notes were guaranteed by GE. - -------------------------------------------------------------------------------- Borrowings of GE and GECS are addressed below from two perspectives-liquidity and interest rate risk management. Additional information about borrowings and associated swaps can be found in note 29. LIQUIDITY requirements of GE and GECS are principally met through the credit markets. Maturities of long-term borrowings (including the current portion) during the next five years follow. (In millions) 2002 2003 2004 2005 2006 - -------------------------------------------------------------------------------- GE $ 80 $ 97 $ 203 $ 13 $ 101 GECS 30,795 25,713 14,630 9,907 6,469 ================================================================================ Committed credit lines of $4.7 billion had been extended to GE by 22 banks at year-end 2001. All of GE's credit lines are available to GECS and its affiliates in addition to their own credit lines. At year-end 2001, GECS held committed lines of credit aggregating $28.6 billion, including $12.2 billion of revolving credit agreements pursuant to which it has the right to borrow funds for periods exceeding one year. Both GE and GECS compensate banks for credit facilities in the form of fees, which were insignificant in each of the past three years. INTEREST RATE RISK is managed by GECS in light of the anticipated behavior, including prepayment behavior, of assets in which debt proceeds are invested. A variety of instruments, including interest rate and currency swaps and currency forwards, are employed to achieve management's interest rate objectives. Effective interest rates are lower under these "synthetic" positions than could have been achieved by issuing debt directly. The following table shows GECS borrowing positions considering the effects of currency and interest rate swaps. GECS EFFECTIVE BORROWINGS (INCLUDING SWAPS) 2001 2000 ---------------------- -------- December 31 Average (In millions) Amount rate Amount -------- ------- -------- Short-term (a) $101,101 2.56% $ 80,162 ======== ======== Long-term (including current portion) Fixed rate (b) $105,387 5.59% $ 98,905 Floating rate 34,031 3.23 26,304 -------- -------- Total long-term $139,418 $125,209 ================================================================================ (a) Includes commercial paper and other short-term debt. (b) Includes fixed-rate borrowings and $28.9 billion ($24.5 billion in 2000) notional long-term interest rate swaps that effectively convert the floating-rate nature of short-term borrowings to fixed rates of interest. - -------------------------------------------------------------------------------- At December 31, 2001, swap maturities ranged from 2002 to 2048. F-41 ANNUAL REPORT PAGE 81 19 GECS INSURANCE LIABILITIES, RESERVES AND ANNUITY BENEFITS December 31 (In millions) 2001 2000 -------- -------- Investment contracts and universal life benefits $ 39,052 $ 33,232 Life insurance benefits (a) 31,198 32,288 Unpaid claims and claims adjustment expenses (b) 27,233 22,886 Unearned premiums 6,337 6,039 Separate accounts (see note 17) 10,403 11,705 -------- -------- $114,223 $106,150 ================================================================================ (a) Life insurance benefits are accounted for mainly by a net-level-premium method using estimated yields generally ranging from 2% to 9% in both 2001 and 2000. (b) Principally property and casualty reserves; includes amounts for both reported and incurred-but-not-reported claims, reduced by anticipated salvage and subrogation recoveries. Estimates of liabilities are reviewed and updated continually, with changes in estimated losses reflected in operations. - -------------------------------------------------------------------------------- When GECS cedes insurance to third parties, it is not relieved of its primary obligation to policyholders. Losses on ceded risks give rise to claims for recovery; allowances for probable losses are established on such receivables from reinsurers as required. The insurance liability for unpaid claims and claims adjustment expenses related to policies that may cover environmental and asbestos exposures is based on known facts and an assessment of applicable law and coverage litigation. Liabilities are recognized for both known and unasserted claims (including the cost of related litigation) when sufficient information has been developed to indicate that a claim has been incurred and a range of potential losses can be reasonably estimated. Developed case law and adequate claim history do not exist for certain claims principally due to significant uncertainties as to both the level of ultimate losses that will occur and what portion, if any, will be deemed to be insured amounts. A summary of activity affecting unpaid claims and claims adjustment expenses, principally in property and casualty lines follows. (In millions) 2001 2000 1999 -------- -------- -------- Balance at January 1-gross $ 22,886 $ 21,473 $ 19,611 Less reinsurance recoverables (5,477) (4,832) (3,483) -------- -------- -------- Balance at January 1-net 17,409 16,641 16,128 Claims and expenses incurred Current year 9,199 9,718 6,917 Prior years 682 607 248 Claims and expenses paid Current year (3,021) (3,704) (2,508) Prior years (6,694) (6,572) (5,162) Claims reserves related to acquired companies -- 488 929 Other 258 231 89 -------- -------- -------- Balance at December 31-net 17,833 17,409 16,641 Add reinsurance recoverables 9,400 5,477 4,832 -------- -------- -------- Balance at December 31-gross $ 27,233 $ 22,886 $ 21,473 ================================================================================ Prior-year claims and expenses incurred in the preceding table resulted principally from settling claims established in earlier accident years for amounts that differed from expectations. Financial guarantees and credit life risk of insurance affiliates are summarized below. December 31 (In millions) 2001 2000 --------- --------- Guarantees, principally on municipal bonds and asset-backed securities $ 215,874 $ 194,061 Mortgage insurance risk in force 79,892 68,112 Credit life insurance risk in force 16,590 19,910 Less reinsurance (41,148) (42,143) --------- --------- $ 271,208 $ 239,940 ================================================================================ Certain GECS insurance affiliates offer insurance guaranteeing the timely payment of scheduled principal and interest on municipal bonds and certain asset-backed securities. These insurance affiliates also provide insurance to protect residential mortgage lenders from severe financial loss caused by the non-payment of loans and issue credit life insurance designed to pay the balance due on a loan if the borrower dies before the loan is repaid. As part of their overall risk management process, GECS insurance affiliates cede to third parties a portion of their risk associated with these guarantees. In doing so, they are not relieved of their primary obligation to policyholders. F-42 ANNUAL REPORT PAGE 82 20 GE ALL OTHER LIABILITIES This caption includes noncurrent compensation and benefit accruals at year-end 2001 and 2000 of $6,639 million and $6,268 million, respectively. Also included are amounts for deferred incentive compensation, deferred income, interest on tax liabilities, product warranties and a variety of sundry items. GE is involved in numerous remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs at each site are based on management's best estimate of undiscounted future costs, excluding possible insurance recoveries. When there appears to be a range of possible costs with equal likelihood, liabilities are based on the lower end of such range. Uncertainties about the status of laws, regulations, technology and information related to individual sites make it difficult to develop a meaningful estimate of the reasonably possible aggregate environmental remediation exposure. However, even in the unlikely event that remediation costs amounted to the high end of the range of costs for each site, the resulting additional liability would not be material to GE's financial position, results of operations or liquidity. 21 DEFERRED INCOME TAXES Aggregate deferred income tax amounts are summarized below. December 31 (In millions) 2001 2000 ------- ------- ASSETS GE $ 6,416 $ 6,131 GECS 8,585 7,309 ------- ------- 15,001 13,440 LIABILITIES GE 7,429 6,583 GECS 16,702 15,547 ------- ------- 24,131 22,130 ------- ------- NET DEFERRED INCOME TAX LIABILITY $ 9,130 $ 8,690 ================================================================================ Principal components of the net liability/(asset) representing deferred income tax balances for GE and GECS are as follows: December 31 (In millions) 2001 2000 ------- ------- GE Provisions for expenses (a) $(4,432) $(4,392) Retiree insurance plans (953) (904) Prepaid pension asset 4,809 3,982 Depreciation 932 944 Other-net 657 822 ------- ------- 1,013 452 ------- ------- GECS Financing leases 9,168 8,408 Operating leases 3,399 3,301 Deferred insurance acquisition costs 1,360 856 Allowance for losses (2,139) (1,684) Insurance reserves (1,397) (1,270) AMT credit carryforwards (695) (671) Other-net (1,579) (702) ------- ------- 8,117 8,238 ------- ------- NET DEFERRED INCOME TAX LIABILITY $ 9,130 $ 8,690 ================================================================================ (a) Represents the tax effects of temporary differences related to expense accruals for a wide variety of items, such as employee compensation and benefits, interest on tax liabilities, product warranties and other sundry items that are not currently deductible. - -------------------------------------------------------------------------------- 22 GECS MINORITY INTEREST IN EQUITY OF CONSOLIDATED AFFILIATES Minority interest in equity of consolidated GECS affiliates includes preferred stock issued by GE Capital and by affiliates of GE Capital. The preferred stock primarily pays cumulative dividends at variable rates. Value of the preferred shares is summarized below. December 31 (In millions) 2001 2000 ------ ------ GE Capital $2,600 $2,600 GE Capital affiliates 1,446 1,066 ================================================================================ Dividend rates in local currency on the preferred stock ranged from 1.62% to 6.40% during 2001 and from 4.15% to 6.82% during 2000. 23 RESTRICTED NET ASSETS OF GECS AFFILIATES Certain GECS consolidated affiliates are restricted from remitting funds to GECS in the form of dividends or loans by a variety of regulations, the purpose of which is to protect affected insurance policyholders, depositors or investors. At year-end 2001, net assets of regulated GECS affiliates amounted to $37.4 billion, of which $31.7 billion was restricted. At December 31, 2001 and 2000, the aggregate statutory capital and surplus of the insurance businesses totaled $17.7 billion and $16.2 billion, respectively. Accounting practices prescribed by statutory authorities are used in preparing statutory statements. F-43 ANNUAL REPORT PAGE 83 24 SHARE OWNERS' EQUITY (In millions) 2001 2000 1999 -------- -------- -------- COMMON STOCK ISSUED $ 669 $ 669 $ 594 -------- -------- -------- ACCUMULATED NONOWNER CHANGES OTHER THAN EARNINGS Balance at January 1 $ (2,500) $ (744) $ 1,664 Cumulative effect of adopting SFAS 133-net of deferred taxes of $(513) (827) -- -- Investment securities-net of deferred taxes of $111, $686 and $(614) 203 1,363 (1,132) Currency translation adjustments-net of deferred taxes of $48, $(312) and $(100) (562) (1,204) (632) Derivatives qualifying as hedges-net of deferred taxes $(505) (690) -- -- Reclassification adjustments- Investment securities-net of deferred taxes of $(274), $(1,031) and $(349) (509) (1,915) (644) Derivatives qualifying as hedges-net of deferred taxes of $397 562 -- -- -------- -------- -------- Balance at December 31 $ (4,323) $ (2,500) $ (744) ======== ======== ======== OTHER CAPITAL Balance at January 1 $ 15,195 $ 10,790 $ 6,808 Gains on treasury stock dispositions (a) 1,498 4,480 3,982 Adjustment for stock split -- (75) -- -------- -------- -------- Balance at December 31 $ 16,693 $ 15,195 $ 10,790 ======== ======== ======== RETAINED EARNINGS Balance at January 1 $ 61,572 $ 54,484 $ 48,553 Net earnings 13,684 12,735 10,717 Dividends (a) (6,555) (5,647) (4,786) -------- -------- -------- Balance at December 31 $ 68,701 $ 61,572 $ 54,484 ======== ======== ======== COMMON STOCK HELD IN TREASURY Balance at January 1 $ 24,444 $ 22,567 $ 18,739 Purchases (a) 4,708 5,342 7,488 Dispositions (a) (2,236) (3,465) (3,660) -------- -------- -------- Balance at December 31 $ 26,916 $ 24,444 $ 22,567 ================================================================================ (a) Total dividends and other transactions with share owners reduced equity by $7,529 million, $3,044 million and $4,632 million in 2001, 2000 and 1999, respectively. - -------------------------------------------------------------------------------- In December 2001, GE's Board of Directors increased the authorization to repurchase Company common stock to $30 billion. Funds used for the share repurchase will be generated largely from free cash flow. Through year-end 2001, 1,030 million shares having an aggregate cost of almost $21 billion had been repurchased under this program and placed in treasury. Common shares issued and outstanding are summarized in the following table. SHARES OF GE COMMON STOCK December 31 (In thousands) 2001 2000 1999 ----------- ----------- ----------- Issued 11,145,212 11,145,212 11,145,054 In treasury (1,219,274) (1,213,206) (1,290,526) ----------- ----------- ----------- Outstanding 9,925,938 9,932,006 9,854,528 ================================================================================ In April 2000, share owners authorized (a) an increase in the number of authorized shares of common stock from 4,400,000,000 shares each with a par value of $0.16 to 13,200,000,000 shares each with a par value of $0.06 and (b) the split of each unissued and issued common share, including shares held in treasury, into three shares of common stock each with a par value of $0.06. All share data and per-share amounts have been adjusted to reflect this change. GE has 50 million authorized shares of preferred stock ($1.00 par value), but no such shares have been issued. The effects of translating to U.S. dollars the financial statements of non-U.S. affiliates whose functional currency is the local currency are included in share owners' equity. Asset and liability accounts are translated at year-end exchange rates, while revenues and expenses are translated at average rates for the period. F-44 ANNUAL REPORT PAGE 84 25 OTHER STOCK-RELATED INFORMATION STOCK OPTION ACTIVITY Average per share Shares --------------------- subject Exercise Market (Shares in thousands) to option price price --------- -------- ------ Balance at December 31, 1998 359,784 $ 11.59 $ 34.00 Options granted 51,281 37.93 37.93 Options exercised (61,679) 7.82 39.42 Options terminated (8,012) 21.15 -- -------- ------ ------ Balance at December 31, 1999 341,374 16.01 51.58 Options granted 46,278 47.84 47.84 Options exercised (44,758) 8.82 53.00 Options terminated (9,715) 28.47 -- -------- ------ ------ Balance at December 31, 2000 333,179 21.03 47.94 Options granted 60,946 41.15 41.15 Options exercised (31,801) 10.04 43.95 Options terminated (7,871) 39.02 -- -------- ------ ------ Balance at December 31, 2001 354,453 25.08 40.08 ================================================================================ Stock option plans, stock appreciation rights (SARs), restricted stock and restricted stock units are described in GE's current Proxy Statement. With certain restrictions, requirements for stock option shares can be met from either unissued or treasury shares. At year-end 2001, there were 131 thousand SARs outstanding at an average exercise price of $7.68. There were 27.3 million restricted stock shares and restricted stock units outstanding at year-end 2001. There were 538.7 million and 487.1 million additional shares available for grants of options, SARs, restricted stock and restricted stock units at December 31, 2001 and 2000, respectively. Under the 1990 Long-Term Incentive Plan, 0.95% of the Company's issued common stock (including treasury shares) as of the first day of each calendar year during which the Plan is in effect becomes available for granting awards in such year. Any unused portion, in addition to shares allocated to awards that are canceled or forfeited, is available for later years. Outstanding options and SARs expire on various dates through December 21, 2011. Restricted stock grants vest on various dates up to normal retirement of grantees. The following table summarizes information about stock options outstanding at December 31, 2001. STOCK OPTIONS OUTSTANDING (Shares in thousands) Outstanding Exercisable ------------------------------- ---------------------- Average Average Exercise Average exercise exercise price range Shares life (a) price Shares price - -------------------------------------------------------------------------------- $5.72-8.50 58,324 1.6 $ 7.63 58,324 $ 7.63 8.51-13.23 65,494 2.9 9.15 65,494 9.15 13.48-26.10 66,065 5.2 18.13 53,465 16.94 26.42-39.73 81,807 7.9 34.79 24,881 32.20 41.35-57.31 82,763 9.0 45.91 6,908 47.45 ------- --- ------ ------- ------ Total 354,453 5.7 25.08 209,072 14.73 ================================================================================ At year-end 2000, options with an average exercise price of $11.35 were exercisable on 205 million shares; at year-end 1999, options with an average exercise price of $9.13 were exercisable on 206 million shares. (a) Average contractual life remaining in years. - -------------------------------------------------------------------------------- Stock options expire 10 years from the date they are granted; options vest over service periods that range from one to five years. Disclosures required by SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, are as follows: OPTION VALUE INFORMATION (a) (In dollars) 2001 2000 1999 ------ ------ ------ Fair value per option (b) $12.15 $15.76 $11.23 Valuation assumptions Expected option term (years) 6.0 6.4 6.5 Expected volatility 30.5% 27.1% 23.7% Expected dividend yield 1.6% 1.2% 1.3% Risk-free interest rate 4.9% 6.4% 5.8% ================================================================================ (a) Weighted averages of option grants during each period. (b) Estimated using Black-Scholes option pricing model. - -------------------------------------------------------------------------------- PRO FORMA EFFECTS (a) December 31 (In millions; per-share amounts in dollars) 2001 2000 1999 ------- ------- ------- Net earnings $13,388 $12,502 $10,572 Earnings per share-diluted 1.33 1.24 1.06 -basic 1.35 1.26 1.08 ================================================================================ (a) 2001 earnings and earnings per share include effects of accounting changes. - -------------------------------------------------------------------------------- F-45 ANNUAL REPORT PAGE 85 26 SUPPLEMENTAL CASH FLOWS INFORMATION Changes in operating assets and liabilities are net of acquisitions and dispositions of principal businesses. "Payments for principal businesses purchased" in the Statement of Cash Flows is net of cash acquired and includes debt assumed and immediately repaid in acquisitions. "All other operating activities" in the Statement of Cash Flows consists primarily of adjustments to current and noncurrent accruals and deferrals of costs and expenses, increases and decreases in progress collections, adjustments for gains and losses on assets, increases and decreases in assets held for sale, and adjustments to assets. Noncash transactions include the following: in 2001, the acquisition of Imatron Inc. for GE common stock valued at $205 million; in 2000, the acquisition of Harmon Industries for shares of GE common stock valued at $346 million; and in 1999, GE's contribution of certain media properties in exchange for a noncontrolling interest in NBCi, a former publicly-traded company (described in note 2). Certain supplemental information related to GE and GECS cash flows is shown below.
For the years ended December 31 (In millions) 2001 2000 1999 --------- --------- -------- GE PURCHASES AND SALES OF GE SHARES FOR TREASURY Open market purchases under share repurchase program $ (3,137) $ (2,226) $ (1,866) Other purchases (1,571) (3,116) (5,622) Dispositions (mainly to employee and dividend reinvestment plans) 2,273 5,811 6,486 --------- --------- -------- $ (2,435) $ 469 $ (1,002) ========= ========= ======== GECS FINANCING RECEIVABLES Increase in loans to customers $(140,758) $(100,938) $(95,201) Principal collections from customers-loans 121,004 87,432 86,379 Investment in equipment for financing leases (20,315) (15,454) (18,173) Principal collections from customers-financing leases 11,641 7,873 13,634 Net change in credit card receivables (14,815) (9,394) (10,740) Sales of financing receivables 29,291 14,405 11,473 --------- --------- -------- $ (13,952) $ (16,076) $(12,628) ========= ========= ======== ALL OTHER INVESTING ACTIVITIES Purchases of securities by insurance and annuity businesses $ (53,452) $ (35,911) $(26,271) Dispositions and maturities of securities by insurance and annuity businesses 45,403 25,960 23,979 Proceeds from principal business dispositions 2,572 (605) 279 Other (2,080) (1,617) (6,270) --------- --------- -------- $ (7,557) $ (12,173) $ (8,283) ========= ========= ======== NEWLY ISSUED DEBT HAVING MATURITIES LONGER THAN 90 DAYS Short-term (91 to 365 days) $ 12,622 $ 12,782 $ 15,799 Long-term (longer than one year) 16,118 32,297 30,082 Proceeds-nonrecourse, leveraged lease debt 2,012 1,808 1,724 --------- --------- -------- $ 30,752 $ 46,887 $ 47,605 ========= ========= ======== REPAYMENTS AND OTHER REDUCTIONS OF DEBT HAVING MATURITIES LONGER THAN 90 DAYS Short-term (91 to 365 days) $ (29,195) $ (27,777) $(21,211) Long-term (longer than one year) (6,582) (3,953) (5,447) Principal payments-nonrecourse, leveraged lease debt (274) (177) (266) --------- --------- -------- $ (36,051) $ (31,907) $(26,924) ========= ========= ======== ALL OTHER FINANCING ACTIVITIES Proceeds from sales of investment contracts $ 9,080 $ 8,826 $ 7,236 Redemption of investment contracts (7,033) (9,061) (7,127) Preferred stock issued by GECS affiliates -- -- 513 Capital contributions from GE 3,043 -- -- Cash received upon assumption of Toho Mutual Life Insurance Company insurance liabilities -- 13,177 -- --------- --------- -------- $ 5,090 $ 12,942 $ 622 =========================================================================================
F-46 ANNUAL REPORT PAGE 86 27 OPERATING SEGMENTS
REVENUES (For the years ended December 31) Total revenues Intersegment revenues External revenues --------------------------------- --------------------------- --------------------------------- (In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999 --------- --------- --------- ------- ------- ------- --------- --------- --------- GE Aircraft Engines $ 11,389 $ 10,779 $ 10,730 $ 1,282 $ 687 $ 477 $ 10,107 $ 10,092 $ 10,253 Appliances 5,810 5,887 5,671 4 5 4 5,806 5,882 5,667 Industrial Products and Systems 11,647 11,630 11,399 848 634 530 10,799 10,996 10,869 Materials 7,069 8,020 7,118 21 46 38 7,048 7,974 7,080 NBC 5,769 6,797 5,790 -- -- -- 5,769 6,797 5,790 Power Systems 20,211 14,861 10,099 152 144 169 20,059 14,717 9,930 Technical Products and Services 9,011 7,915 6,863 21 19 15 8,990 7,896 6,848 Eliminations (2,900) (2,101) (1,788) (2,328) (1,535) (1,233) (572) (566) (555) --------- --------- --------- ------- ------- ------- --------- --------- --------- Total GE segment revenues 68,006 63,788 55,882 -- -- -- 68,006 63,788 55,882 Corporate items 445 517 619 -- -- -- 445 517 619 GECS earnings before accounting changes 5,586 5,192 4,443 -- -- -- 5,586 5,192 4,443 --------- --------- --------- ------- ------- ------- --------- --------- --------- Total GE revenues 74,037 69,497 60,944 -- -- -- 74,037 69,497 60,944 GECS SEGMENT REVENUES 58,353 66,177 55,749 -- -- -- 58,353 66,177 55,749 Eliminations (6,477) (5,821) (5,063) -- -- -- (6,477) (5,821) (5,063) --------- --------- --------- ------- ------- ------- --------- --------- --------- CONSOLIDATED REVENUES $ 125,913 $ 129,853 $ 111,630 $ -- $ -- $ -- $ 125,913 $ 129,853 $ 111,630 =================================================================================================================================== GE revenues include income from sales of goods and services to customers and other income. Sales from one Company component to another generally are priced at equivalent commercial selling prices. - -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT DEPRECIATION AND AMORTIZATION ADDITIONS (INCLUDING (INCLUDING GOODWILL AND ASSETS EQUIPMENT LEASED TO OTHERS) OTHER INTANGIBLES) For the years ended For the years ended At December 31 December 31 December 31 --------------------------------- ------------------------- ---------------------- (In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999 --------- --------- --------- ------- ------- ------- ------ ------ ------ GE Aircraft Engines $ 9,711 $ 9,816 $ 9,204 $ 402 $ 416 $ 368 $ 340 $ 330 $ 382 Appliances 3,100 2,775 2,463 246 213 151 188 142 147 Industrial Products and Systems 8,372 7,647 6,524 382 495 408 425 416 416 Materials 10,154 9,783 9,477 814 573 477 611 558 578 NBC 5,359 4,965 5,243 64 99 94 137 120 126 Power Systems 13,169 11,618 9,865 774 657 514 375 306 285 Technical Products and Services 6,654 6,016 5,048 213 211 164 278 219 230 --------- --------- --------- ------- ------- ------- ------ ------ ------ Total GE segments 56,519 52,620 47,824 2,895 2,664 2,176 2,354 2,091 2,164 Investment in GECS 28,590 23,022 20,321 -- -- -- -- -- -- Corporate items and eliminations (a) 24,624 21,123 14,438 94 55 58 145 157 155 --------- --------- --------- ------- ------- ------- ------ ------ ------ Total GE 109,733 96,765 82,583 2,989 2,719 2,234 2,499 2,248 2,319 GECS SEGMENT 425,484 370,636 345,018 13,744 11,434 15,432 4,590 5,488 4,372 Eliminations (40,194) (30,395) (22,401) -- -- -- -- --------- --------- --------- ------- ------- ------- ------ ------ ------ CONSOLIDATED TOTALS $ 495,023 $ 437,006 $ 405,200 $16,733 $14,153 $17,666 $7,089 $7,736 $6,691 ==================================================================================================================== Additions to property, plant and equipment include amounts relating to principal businesses purchased. (a) Depreciation and amortization includes $64 million of unallocated RCA goodwill amortization in 2001, 2000 and 1999 that relates to NBC. - --------------------------------------------------------------------------------------------------------------------
F-47 ANNUAL REPORT PAGE 87 BASIS FOR PRESENTATION. The Company's operating businesses are organized based on the nature of products and services provided. Certain GE businesses do not meet the definition of a reportable operating segment and have been aggregated. The Materials segment consists of Plastics and Specialty Materials. The Industrial Products and Systems segment consists of Industrial Systems, Lighting, Transportation Systems and GE Supply. The Technical Products and Services segment consists of Medical Systems and Global eXchange Services. Segment accounting policies are the same as described in note 1. Details of segment profit by operating segment can be found on page 51 of this report. A description of operating segments for General Electric Company and consolidated affiliates follows. AIRCRAFT ENGINES. Jet engines and replacement parts and repair and maintenance services for all categories of commercial aircraft (short/medium, intermediate and long-range); for a wide variety of military aircraft, including fighters, bombers, tankers and helicopters; and for executive and commuter aircraft. Products and services are sold worldwide to airframe manufacturers, airlines and government agencies. Also includes aircraft engine derivatives, used as marine propulsion and industrial power sources; the latter is also reported in Power Systems. APPLIANCES. Major appliances and related services for products such as refrigerators, freezers, electric and gas ranges, dishwashers, clothes washers and dryers, microwave ovens, room air conditioners and residential water system products. Products and services are sold in North America and in global markets under various GE and private-label brands. Distributed to both retail outlets and direct to consumers, mainly for the replacement market, and to building contractors and distributors for new installations. INDUSTRIAL PRODUCTS AND SYSTEMS. Lighting products (including a wide variety of lamps, lighting fixtures and wiring devices); electrical distribution and control equipment (including power delivery and control products such as transformers, meters, relays, capacitors and arresters); transportation systems products and maintenance services (including diesel and electric locomotives, transit propulsion equipment, motorized wheels for off-highway vehicles, and railway signaling communications systems); electric motors and related products; a broad range of electrical and electronic industrial automation products (including drive systems); installation, engineering and repair services, which includes management and technical expertise for large projects such as process control systems; and GE Supply, a network of electrical supply houses. Markets are extremely diverse. Products and services are sold to commercial and industrial end users, including utilities, to original equipment manufacturers, to electrical distributors, to retail outlets, to railways and to transit authorities. Increasingly, products and services are developed for and sold in global markets. MATERIALS. High-performance engineered plastics used in applications such as automobiles and housings for computers and other business equipment; ABS resins; silicones; superabrasive industrial diamonds; quartz products; and laminates. Products are sold worldwide to a diverse customer base consisting mainly of manufacturers. NBC. Principal businesses are the furnishing of U.S. network television services to more than 220 affiliated stations, production of television programs, operation of 13 VHF and UHF television broadcasting stations, operation of four cable/satellite networks around the world, and investment and programming activities in the Internet, multimedia and cable television. POWER SYSTEMS. Power plant products and services, including design, installation, operation and maintenance services. Markets and competition are global. Gas turbines and aircraft engine derivatives and related services are sold separately and as part of packaged power plants for electric utilities, independent power producers and for industrial cogeneration and mechanical drive applications. Steam turbine-generators and related services are sold to electric utilities and, for cogeneration, to industrial and other power customers. Also includes portable power plants, nuclear reactors and fuel and support services for GE's new and installed boiling water reactors, and equipment to support the distribution of oil and gas products. TECHNICAL PRODUCTS AND SERVICES. Medical imaging systems such as magnetic resonance (MR) and computed tomography (CT) scanners, x-ray, nuclear imaging and ultrasound, as well as diagnostic cardiology and patient monitoring devices; related services, including equipment monitoring and repair, computerized data management and customer productivity services. Products and services are sold worldwide to hospitals and medical facilities. Also includes a full range of computer-based information and data interchange services for both internal and external use to commercial and industrial customers. GECS. The operating activities of the GECS segment follow. CONSUMER SERVICES-private-label credit card loans, personal loans, time sales and revolving credit and inventory financing for retail merchants, auto leasing and inventory financing, mortgage servicing, retail business and consumer savings and insurance services. EQUIPMENT MANAGEMENT-leases, loans, sales and asset management services for portfolios of commercial and transportation equipment, including aircraft, trailers, auto fleets, modular space units, railroad rolling stock, data processing equipment, and marine shipping containers. MID-MARKET FINANCING-loans, financing and operating leases, and other services for middle-market customers, including manufacturers, distributors and end users, for a variety of equipment that includes vehicles, corporate aircraft, data processing equipment, medical and diagnostic equipment, and equipment used in construction, manufacturing, office applications, electronics and telecommunications activities. SPECIALIZED FINANCING-loans and financing leases for major capital assets, including industrial facilities and equipment, and energy-related facilities; commercial and residential real estate loans and investments; and loans to and investments in public and private entities in diverse industries. SPECIALTY INSURANCE-U.S. and international multiple-line property and casualty reinsurance; certain directly written specialty insurance and life reinsurance; financial guaranty insurance, principally on municipal bonds and asset-backed securities and private mortgage insurance. Very few of the products financed by GECS are manufactured by GE. F-48 ANNUAL REPORT PAGE 88 28 GEOGRAPHIC SEGMENT INFORMATION (CONSOLIDATED) The table below presents data by geographic region. Revenues and operating profit shown below are classified according to their country of origin (including exports from such areas). Revenues classified under the caption "United States" include royalty and licensing income from non-U.S. sources.
REVENUES For the years ended December 31 Total revenues Intersegment revenues External revenues -------------------------------- --------------------------------- --------------------------------- (In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- United States $ 89,876 $ 90,981 $ 78,970 $ 3,877 $ 3,518 $ 2,690 $ 85,999 $ 87,463 $ 76,280 Europe 23,878 24,144 22,919 2,009 1,212 1,081 21,869 22,932 21,838 Pacific Basin 11,447 12,921 7,879 1,258 1,218 924 10,189 11,703 6,955 Other (a) 8,963 8,754 7,365 1,107 999 808 7,856 7,755 6,557 Intercompany eliminations (8,251) (6,947) (5,503) (8,251) (6,947) (5,503) -- -- -- -------- --------- --------- --------- --------- --------- --------- --------- --------- Total $125,913 $ 129,853 $ 111,630 $ -- $ -- $ -- $ 125,913 $ 129,853 $ 111,630 ===================================================================================================================================
SEGMENT OPERATING PROFIT (b) ASSETS LONG-LIVED ASSETS (c) For the years ended December 31 At December 31 At December 31 -------------------------------- --------------------------------- --------------------------------- (In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999 United States $ 18,055 $ 15,455 $ 13,391 $ 315,179 $ 277,818 $ 264,129 $ 18,593 $ 19,180 $ 21,612 Europe 1,297 2,062 1,886 93,963 80,282 83,358 6,176 5,870 6,101 Pacific Basin 1,857 1,754 1,092 41,385 42,281 28,214 1,888 1,936 2,017 Other (a) 1,210 1,406 909 44,683 36,804 29,687 15,519 13,076 11,329 Intercompany eliminations (8) 9 11 (187) (179) (188) (36) (47) (37) -------- --------- --------- --------- --------- --------- --------- --------- --------- Total $ 22,411 $ 20,686 $ 17,289 $ 495,023 $ 437,006 $ 405,200 $ 42,140 $ 40,015 $ 41,022 =================================================================================================================================== (a) Includes the Americas other than the United States and operations that cannot meaningfully be associated with specific geographic areas (for example, commercial aircraft leased by GE Capital Aviation Services). (b) Excludes GECS income taxes of $1,380 million, $1,912 million and $1,653 million in 2001, 2000 and 1999, respectively, which are included in the measure of segment profit reported on page 51. (c) Property, plant and equipment (including equipment leased to others). - ----------------------------------------------------------------------------------------------------------------------------------
29 ADDITIONAL INFORMATION ABOUT CERTAIN FINANCIAL INSTRUMENTS Assets and liabilities that are reflected in the accompanying financial statements at fair value are not included in the following disclosures; such items include cash and equivalents, investment securities, separate accounts and, beginning in 2001, derivative financial instruments. Other assets and liabilities-those not carried at fair value-are discussed in the following pages. Apart from certain borrowings by GE and GECS and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. Although management has made every effort to develop the fairest representation of fair value for this section, it would be unusual if the estimates could actually have been realized at December 31, 2001 or 2000. A description of how fair values are estimated follows. BORROWINGS. Based on market quotes or comparables. TIME SALES AND LOANS. Based on quoted market prices, recent transactions and/or discounted future cash flows, using rates at which similar loans would have been made to similar borrowers. INVESTMENT CONTRACT BENEFITS. Based on expected future cash flows, discounted at currently offered discount rates for immediate annuity contracts or cash surrender values for single premium deferred annuities. FINANCIAL GUARANTEES AND CREDIT LIFE. Based on expected future cash flows, considering expected renewal premiums, claims, refunds and servicing costs, discounted at a current market rate. ALL OTHER INSTRUMENTS. Based on comparable market transactions, discounted future cash flows, quoted market prices, and/or estimates of the cost to terminate or otherwise settle obligations. F-49 ANNUAL REPORT PAGE 89 FINANCIAL INSTRUMENTS
2001 2000 ------------------------------------------- --------------------------------------------- Assets (liabilities) Assets (liabilities) --------------------------------- -------------------------------- Carrying Estimated fair value Carrying Estimated fair value Notional amount -------------------- Notional amount -------------------- December 31 (In millions) amount (net) High Low amount (net) High Low - -------------------------------------------------------------------------------------------------------------------------------- GE Investments and notes receivable (b) $ (a) $ 570 $ 568 $ 568 $ (a) $ 2,012 $ 2,060 $ 2,026 Borrowings (c)(d) (a) (2,509) (2,509) (2,509) (a) (1,781) (1,781) (1,781) Recourse obligations for receivables sold 471 (45) (45) (45) 589 (42) (42) (42) Financial guarantees 3,605 (49) (49) (49) 3,065(g) -- -- -- Financing commitments 1,497 (47) (47) (47) 1,492 -- -- -- Liquidity support 362 -- -- -- -- -- -- -- GECS Assets Time sales and loans (a) 118,584 119,986 117,930 (a) 92,912 93,539 92,360 Mortgages acquired for resale (a) 1,596 1,631 1,596 (a) 1,267 1,250 1,245 Other financial instruments (a) 9,496 9,671 9,599 (a) 10,940 11,130 11,102 Liabilities Borrowings (c)(d) (a) (240,519) (244,069) (244,069) (a) (205,371) (207,670) (207,670) Investment contract benefits (a) (32,427) (32,192) (31,815) (a) (27,575) (26,144) (26,144) Insurance-financial guarantees and credit life (e) 271,208 (2,941) (2,983) (3,091) 239,940 (2,759) (2,797) (2,910) Other financial instruments 4,678 (629) (590) (590) 2,982 (1,184) (1,114) (1,114) Special purpose entity support Credit and liquidity (f) 43,176 (712) (712) (712) 31,197 (630) (630) (630) Credit and liquidity-unused 9,404 -- -- -- 6,470 -- -- -- Performance guarantees 3,759 -- -- -- 2,870(h) -- -- -- -unused 441 -- -- -- 1,330(h) -- -- -- Swap guarantees and other guarantees 8,506 -- -- -- 7,415(h) -- -- -- Other firm commitments Ordinary course of business lending commitments 9,636 -- -- -- 9,450 -- -- -- Unused revolving credit lines Commercial 27,770 -- -- -- 19,372(i) -- -- -- Consumer-principally credit cards 222,929 -- -- -- 188,421 -- -- -- ================================================================================================================================ (a) These financial instruments do not have notional amounts. (b) Amounts in 2000 include $1.0 billion related to Lockheed Martin note, which was prepaid in 2001. (c) Includes effects of interest rate and currency swaps. (d) See note 18. (e) See note 19. (f) Includes credit support of $14,496 million and $9,784 million at December 31, 2001 and 2000, respectively. (g) Reported as $2,345 million in 2000. (h) Reported, in total, as $7,895 million in 2000. (i) Reported as $11,278 million in 2000. - --------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES AND HEDGING. GE and GECS global business activities routinely deal with fluctuations in interest rates, in currency exchange rates and in commodity and other asset prices. GE and GECS apply strict policies to managing each of these risks, including prohibitions on derivatives trading, derivatives market-making or other speculative activities. These policies require the use of derivative instruments in concert with other techniques to reduce or eliminate these risks. F-50 ANNUAL REPORT PAGE 90 On January 1, 2001, GE adopted SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as discussed in note 1. The paragraphs that follow provide additional information about derivatives and hedging relationships in accordance with the requirements of SFAS 133. CASH FLOW HEDGES. Under SFAS 133, cash flow hedges are hedges that use simple derivatives to offset the variability of expected future cash flows. Variability can appear in floating rate assets, floating rate liabilities or from certain types of forecasted transactions, and can arise from changes in interest rates or currency exchange rates. For example, GECS often borrows funds at a variable rate of interest. If GECS needs the funds to make a floating rate loan, there is no exposure to interest rate changes, and no hedge is necessary. However, if a fixed rate loan is made, GECS will contractually commit to pay a fixed rate of interest to a counterparty who will pay GECS a variable rate of interest (an "interest rate swap"). This swap will then be designated as a cash flow hedge of the associated variable rate borrowing. If, as would be expected, the derivative is perfectly effective in offsetting variable interest in the borrowing, changes in its fair value are recorded in a separate component in equity and released to earnings contemporaneously with the earnings effects of the hedged item. Further information about hedge effectiveness is provided below. GE uses currency forwards and options to manage exposures to changes in currency exchange rates associated with commercial purchase and sale transactions. These instruments permit GE to eliminate the cash flow variability, in local currency, of costs or selling prices denominated in currencies other than the functional currency. In addition, GE and GECS use these instruments, along with interest rate and currency swaps, to optimize borrowing costs and investment returns. For example, currency swaps and non-functional currency borrowings together provide lower funding costs than could be achieved by issuing debt directly in a given currency. Adoption of SFAS 133 resulted in a reduction of share owners' equity of $827 million at January 1, 2001. Of that amount, $259 million was transferred to earnings in 2001 along with the earnings effects of the related forecasted transactions for no net impact on earnings. At December 31, 2001, amounts related to derivatives qualifying as cash flow hedges amounted to a reduction of equity of $955 million, of which $665 million was expected to be transferred to earnings in 2002 along with the earnings effects of the related forecasted transactions. In 2001, there were no forecasted transactions that failed to occur. At December 31, 2001, the maximum term of derivative instruments that hedge forecasted transactions was 24 months. FAIR VALUE HEDGES. Under SFAS 133, fair value hedges are hedges that eliminate the risk of changes in the fair values of assets, liabilities and certain types of firm commitments. For example, GECS will use an interest rate swap in which it receives a fixed rate of interest and pays a variable rate of interest to change the cash flow profile of a fixed rate borrowing to match the variable rate financial asset that it is funding. Changes in fair value of derivatives designated and effective as fair value hedges are recorded in earnings and are offset by corresponding changes in the fair value of the hedged item. GE and GECS use interest rate swaps, currency swaps and interest rate and currency forwards to hedge the effect of interest rate and currency exchange rate changes on local and nonfunctional currency denominated fixed-rate borrowings and certain types of fixed-rate assets. Equity options are used to hedge price changes in investment securities and equity-indexed annuity liabilities at GECS. NET INVESTMENT HEDGES. The net investment hedge designation under SFAS 133 refers to the use of derivative contracts or cash instruments to hedge the foreign currency exposure of a net investment in a foreign operation. At GE and GECS, currency exposures that result from net investments in affiliates are managed principally by funding assets denominated in local currency with debt denominated in that same currency. In certain circumstances, such exposures are managed using currency forwards and currency swaps. DERIVATIVES NOT DESIGNATED AS HEDGES. SFAS 133 specifies criteria that must be met in order to apply any of the three forms of hedge accounting. For example, hedge accounting is not permitted for hedged items that are marked to market through earnings. GE and GECS use derivatives to hedge exposures when it makes economic sense to do so, including circumstances in which the hedging relationship does not qualify for hedge accounting as described in the following paragraph. GE and GECS also will occasionally receive derivatives, such as equity warrants, in the ordinary course of business. Under SFAS 133, derivatives that do not qualify for hedge accounting are marked to market through earnings. GE and GECS use option contracts, including caps, floors and collars, as an economic hedge of changes in interest rates, currency exchange rates and equity prices on certain types of assets and liabilities. For example, GECS uses equity options to hedge the risk of changes in equity prices embedded in insurance liabilities associated with annuity contracts written by GE Financial Assurance. GECS also uses interest rate swaps, purchased options and futures as an economic hedge of the fair value of mortgage servicing rights. GE and GECS occasionally obtain equity warrants as part of sourcing or financing transactions. Although these instruments are considered to be derivatives under SFAS 133, their economic risk is similar to, and managed on the same basis as, other equity instruments held by GE and GECS. EARNINGS EFFECTS OF DERIVATIVES. The table that follows provides additional information about the earnings effects of derivatives. In the context of hedging relationships, "effectiveness" refers to the degree to which fair value changes in the hedging instrument offset corresponding fair value changes in the hedged item. Certain elements of hedge positions cannot qualify for hedge accounting under SFAS 133 whether effective or not, and must therefore be marked to market through earnings. Time value of purchased options is the most common example of such elements in instruments used by GE and GECS. Earnings effects of such items are shown in the following table as "amounts excluded from the measure of effectiveness." F-51 ANNUAL REPORT PAGE 91 Cash flow Fair value December 31 (In millions) hedges hedges --------- ---------- Ineffectiveness $ 1 $ 26 Amounts excluded from the measure of effectiveness $(1) $(16) ================================================================================ At December 31, 2001, the fair value of derivatives in a gain position and recorded in "All other assets" is $2.3 billion and the fair value of derivatives in a loss position and recorded in "All other liabilities" is $3.8 billion. The following table provides fair value information about derivative instruments for the year 2000. Following adoption of SFAS 133 on January 1, 2001, all derivative instruments are reported at fair value in the financial statements and similar disclosures for December 31, 2001, are not relevant. 2000 ------------------------------ Assets (liabilities) -------------------- Carrying Notional amount Estimated December 31 (In millions) amount (net) fair value -------- -------- ----------- GE Assets Investment related Cancelable interest rate swap $ 1,046 $ 6 $ 4 Liabilities Borrowings related instruments Interest rate swaps 786 -- (38) Currency swaps 172 -- (4) Other firm commitments Forwards and options 6,961 37 30 GECS Assets Integrated swaps 22,911 (44) (771) Purchased options 9,832 105 164 Options, including "floors" 21,984 202 208 Interest rate swaps and futures 2,798 29 38 Liabilities Interest rate swaps 52,681 -- (208) Currency swaps 24,314 -- (957) Currency forwards 27,902 -- 381 Other firm commitments Currency forwards 1,585 8 47 Currency swaps 647 292 275 ================================================================================ COUNTERPARTY CREDIT RISK. The risk that counterparties to derivative contracts will be financially unable to make payments to GE or GECS according to the terms of the agreements is counterparty credit risk. Counterparty credit risk is managed on an individual counterparty basis, which means that gains and losses are netted for each counterparty to determine the amount at risk. When a counterparty exceeds credit exposure limits in terms of amounts due to GE or GECS, typically as a result of changes in market conditions (see table below), no additional transactions are executed until the exposure with that counterparty is reduced to an amount that is within the established limit. All swaps are executed under master swap agreements containing mutual credit downgrade provisions that provide the ability to require assignment or termination in the event either party is downgraded below A3 or A-. If the downgrade provisions had been triggered at December 31, 2001, GE and GECS could have been required to disburse up to $2.9 billion and could have claimed $0.8 billion from counterparties-the net fair value losses and gains. At December 31, 2001 and 2000, gross fair value gains amounted to $3.3 billion and $3.2 billion, respectively. At December 31, 2001 and 2000, gross fair value losses amounted to $5.4 billion and $4.0 billion, respectively. As part of its ongoing activities, GECS enters into swaps that are integrated into investments in or loans to particular customers. Such integrated swaps not involving assumption of third-party credit risk are evaluated and monitored like their associated investments or loans and are not therefore subject to the same credit criteria that would apply to a stand-alone position. Except for such positions, all other swaps, purchased options and forwards with contractual maturities longer than one year are conducted within the credit policy constraints provided in the table below. Foreign exchange forwards with contractual maturities shorter than one year must be executed with counterparties having an A-1+/ P-1 credit rating and the credit limit for these transactions is $150 million. COUNTERPARTY CREDIT CRITERIA Credit rating ---------------------------- Moody's Standard & Poor's ------- ----------------- Term of transaction Between one and five years Aa3 AA- Greater than five years Aaa AAA Credit exposure limits Up to $50 million Aa3 AA- Up to $75 million Aaa AAA ================================================================================ F-52 ANNUAL REPORT PAGE 92 30 QUARTERLY INFORMATION (UNAUDITED)
First quarter Second quarter Third quarter Fourth quarter (Dollar amounts in millions; ------------------ ---------------- ---------------- ---------------- per-share amounts in dollars) 2001 2000 2001 2000 2001 2000 2001 2000 -------- ------- ------- ------- ------- ------- ------- ------- CONSOLIDATED OPERATIONS Earnings before accounting changes $ 3,017 $ 2,592 $ 3,897 $ 3,378 $ 3,281 $ 3,180 $ 3,933 $ 3,585 Cumulative effect of accounting changes (444) -- -- -- -- -- -- -- -------- ------- ------- ------- ------- ------- ------- ------- Net earnings 2,573 2,592 3,897 3,378 3,281 3,180 3,933 3,585 Per-share amounts before accounting changes Diluted earnings per share $ 0.30 $ 0.26 $ 0.39 $ 0.34 $ 0.33 $ 0.32 $ 0.39 $ 0.36 Basic earnings per share 0.30 0.26 0.39 0.34 0.33 0.32 0.40 0.36 Per-share amounts after accounting changes Diluted earnings per share 0.26 0.26 0.39 0.34 0.33 0.32 0.39 0.36 Basic earnings per share 0.26 0.26 0.39 0.34 0.33 0.32 0.40 0.36 SELECTED DATA GE Sales of goods and services 15,850 14,370 17,588 16,414 16,359 15,578 18,221 17,445 Gross profit from sales 4,960 4,520 5,677 5,372 5,245 4,675 6,059 5,693 GECS Total revenues 14,723 15,681 14,399 16,470 13,298 16,444 15,933 17,582 Operating profit 1,839 1,746 1,855 1,697 1,512 2,020 1,760 1,641 Earnings before accounting changes 1,401 1,210 1,477 1,277 1,301 1,478 1,407 1,227 =================================================================================================================
For GE, gross profit from sales is sales of goods and services less costs of goods and services sold. For GECS, operating profit is "Earnings before income taxes and accounting changes." Earnings-per-share amounts for each quarter are required to be computed independently. As a result, their sum does not equal the total year earnings-per-share amounts in 2000. INDEPENDENT AUDITORS' REPORT TO SHARE OWNERS AND BOARD OF DIRECTORS OF GENERAL ELECTRIC COMPANY We have audited the accompanying statement of financial position of General Electric Company and consolidated affiliates as of December 31, 2001 and 2000, and the related statements of earnings, changes in share owners' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned financial statements appearing on pages F-2 to F-7, F-11 and F-27 to F-52 present fairly, in all material respects, the financial position of General Electric Company and consolidated affiliates at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, the Company in 2001 changed its method of accounting for derivative instruments and hedging activities and impairment of certain beneficial interests in securitized assets. /s/ KPMG LLP - --------------------- KPMG LLP Stamford, Connecticut February 8, 2002 EXHIBIT 12 GENERAL ELECTRIC COMPANY RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions) Years ended December 31 -------------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- GE EXCEPT GECS Earnings $ 10,132 $ 12,230 $ 14,103 $ 16,747 $ 18,506 Less: Equity in undistributed earnings of General Electric Capital Services, Inc. (1,597) (2,124) (2,776) (3,370) (3,625) Plus: Interest and other financial charges included in expense 797 883 810 811 817 One-third of rental expense 179 189 202 216 231 -------- -------- -------- -------- -------- Adjusted "earnings" $ 9,511 $ 11,178 $ 12,339 $ 14,404 $ 15,929 ======== ======== ======== ======== ======== Interest and other financial charges $ 797 $ 883 $ 810 $ 811 $ 817 Interest capitalized 31 38 36 3 10 One-third of rental expense 179 189 202 216 231 -------- -------- -------- -------- -------- Total fixed charges $ 1,007 $ 1,110 $ 1,048 $ 1,030 $ 1,058 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 9.44 10.07 11.78 13.98 15.06 ======== ======== ======== ======== ======== GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES Earnings $ 11,419 $ 13,742 $ 15,942 $ 18,873 $ 20,049 Plus: Interest and other financial charges included in expense 8,445 9,821 10,174 11,903 11,212 One-third of rental expense 423 486 558 608 566 -------- -------- -------- -------- -------- Adjusted "earnings" $ 20,287 $ 24,049 $ 26,674 $ 31,384 $ 31,827 ======== ======== ======== ======== ======== Fixed Charges: Interest and other financial charges $ 8,445 $ 9,821 $ 10,174 $ 11,903 $ 11,212 Interest capitalized 83 126 123 124 98 One-third of rental expense 423 486 558 608 566 -------- -------- -------- -------- -------- Total fixed charges $ 8,951 $ 10,433 $ 10,855 $ 12,635 $ 11,876 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 2.27 2.31 2.46 2.48 2.68 ======== ======== ======== ======== ======== Earnings before income taxes, minority interest and cumulative effect of changes in accounting principle. Earnings after income taxes, net of dividends, and before cumulative effect of changes in accounting principle. Considered to be representative of interest factor in rental expense.
-----END PRIVACY-ENHANCED MESSAGE-----